I. Introduction
Our system of accounting for health care costsFootnote 1 is misleading, helping mask significant ethical problems — including resource allocation issues — that ought to be remedied.Footnote 2 Our methods for calculating total spending on health care rely heavily on the cumulative cost of individual patient interactions, represented by diagnostic codes and similar reimbursement methods.Footnote 3 Behind these singular financial transactions meant to track the provision of health care, however, is a complex monetary system that has become focused on health care financialization rather than on “the production of patient and community health.”Footnote 4 Money is being siphoned from the system in multiple ways, creating profit for people who do not provide care but rather harm patient and community health.Footnote 5 These means of appropriation include rent-seeking,Footnote 6 unreasonable price setting,Footnote 7 and inappropriate manipulation of programs meant to subsidize care for those with financial vulnerabilities, which I will refer to as gamesmanship.Footnote 8
According to the definition of financialization used here, the money lost to financialization — including in the three categories of rent seeking, unreasonable price setting, and gamesmanship — is not used to provide health care. Therefore, if we want a true picture of how much we are spending on providing care, rather than a picture of how much our health care financing system costs us, these expenditures must be identified and separated from both the total cost of our system and per capita costs. The exercise here is not merely distinguishing between money spent trying to provide health care and money that genuinely provides it. The distinction is between those who legitimately participate in the health care system and those who siphon off resources that otherwise would go to providing care. The distinction between these two numbers is both theoretically significant and, likely, financially significant.
Furthermore, the monetary cost of harm caused to patients and communities by financialization ought to be separated from the cost of health care; these costs are the costs of financialization, not the costs of a system that solely seeks to address illness and injury. For example, unreasonable price setting likely causes patients to delay care in response to overall costs of accessing care, which is associated with worse outcomes and greater expenses.Footnote 9
Section II of this Article focuses on the problems caused by financialization and by masking its costs, showing how little value many of these actors add (even as they cause harm) through a case study of deals involving hospitals, private equity, and a real estate investment trust. Section III discusses the ethical implications of financialization, developing a method for constructing a duty to impose on those who benefit from financialization, one that requires them to justify their profit against the foreseeable harms they may cause to patients and the community. Section IV discusses how this problem is both exacerbated and can be addressed through accounting methodology, particularly given the rhetoric potency accounting results have in discussions about health care spending. Section V is the conclusion.
Identifying and separating non-health care costs from overall costs of the system allows for forthright discussion about the effects of financialization on the resources available for providing health care and about whether this specific type of payment furthers the goals of a health care financing system. The effect is likely big enough to merit the work necessary for this form of accounting to occur. Even with the likely challenges in doing this, a structured recognition of these distinguishable categories of spending ought to make future discussions about resource allocation and funding methods more accurate, rational, and ethically informed.
II. The Problem of Financialization’s Costs Being Masked
The cost of financialization is ethically important, and, as such, requires justification. Given finite resources, any resource allocation decision is ethically charged, as some may go without necessary care based on these decisions. Our primary rationing tool to deal with the scarce resources available for health care is money, so every act of setting a price and every dollar that goes towards profit will foreseeably cause some harm by limiting some people’s access to necessary care. After all, when a price is set, some people likely will not be able to pay it and will therefore forgo care.Footnote 10 Problematic profit seeking of the type described here is different than, for example, reasonable payment for a person’s labor, such as the direct provision of health care for a patient. The further a payment gets from this type of interaction, both in terms of reasonableness and whether it is directly for the provision of care, the more problematic. It follows that those who profit ought to justify themselves by showing how they have a reasonable claim to these dollars considering the foreseeable likely harm they are causing by their behaviors. They should not have that money without persuasive justification.
It is likely an open question as to whether the difference described here is one of degree or category, but the answer is functionally not important. Given the foreseeable harms caused by all behaviors that relate to cost or distribution, justification is always required. It is straightforward to justify the cost when, again using the example given above, one is paying someone a reasonable wage for their labor, and the work is providing direct care to a patient. It is difficult, if not impossible, to justify taking money from this system when it is profit, derived through gamesmanship or some other form of manipulation.
We have inadvertently legitimized financialization through our accounting methodologies by folding them into overall cost calculations, even as we readily recognize they are problematic.Footnote 11 There is currently no method for reliably calculating these costs. To the contrary, one of the attractive attributes of private equity investing is that it is not subject to the reporting requirements of an investment fund that is subject to SEC disclosures.Footnote 12 People who set prices for drug and medical devices that are subject to intellectual property protection consistently resist efforts to justify their pricing decisions.Footnote 13 Finally, those who manipulate the details of government programs in an effort to maximize profit are unlikely to be open about the money they make doing so.Footnote 14
Currently, to constrain our health care spending and minimize the foreseeable harms of price setting and limited resources, we look downstream for savings, ignoring the predatory financing arrangements, acquisitions, and initial price settings that have already occurred.Footnote 15 This is both problematic and unlikely to yield the desired result of spending our limited health care resources in a manner that provides the most high-quality care for the most people. There may be legitimate room for asking patients, providers, and hospitals to be economical, but it is structurally incorrect to focus solely on this while ignoring the increasing economic pressure caused by financialization. This is particularly true because the profit seeking conduct described in this Article exerts pressure on providers that in turn distorts how care is provided. Focusing solely on downstream savings puts providers under pressure from both profit seekers and cost minimizers, a situation that harms their ability to best care for patients.Footnote 16
For example, private equity investments in health care consistently results in health care costs increasing and quality decreasing, yet we do not account for this distortion when we add up our spending on health care.Footnote 17 We have research showing these problems consistently occur when providers enter arrangements where capital is extracted and debt servicing is imposed — classic components of a private equity deal.Footnote 18 If a provider is pressured to increase patient volume or levels of diagnosis because it has this debt to service, those costs are calculated as merely being the cost of providing patient care, rather than the result of predatory financing mechanisms. This causes us to look more critically at the doctor-patient interaction when seeking savings than at the rent seeker, the ultimate recipient of this extra money now flowing from the practice.
This dynamic can be seen by tracing the various deals and arrangements entered into by Medical Properties Trust (“MPT”),Footnote 19 a Real Estate Investment Trust (“REIT”) that primarily functions as a sale/leaseback company. It purchases the land under struggling hospitals in the United States and then leases that same land back to the hospital that once owned it.Footnote 20 The hospitals make lease payments in return for the capital infusion of the purchase price. The lease payments are like debt because the hospitals must service the payments with income streams, but different than a mortgage because the hospital has given up ownership of the underlying real estate, meaning there is no underlying asset being acquired. The payment made by the REIT in exchange for the sale of the real estate goes to the company that owns the hospital, which can distribute it however it chooses. In a case study discussed below, it was largely used to issue a dividend to the private equity firms that created the entity that owned the struggling hospitals.Footnote 21 These hospital groups routinely enter subsequent new financing arrangements in an effort to refinance unpaid lease payments, resulting in them being sold, entering bankruptcy, or simply being refinanced, with MPT getting a payout from the proceeds (to reduce the debt owed them) even as they also finance the sale by loaning money to the new owner or entity that controls the hospital.Footnote 22
A particularly well-studied set of deals leading to monetary extraction, bankruptcy, and negative impact on patient care occurred when private equity firm Cerberus Capital Management L.P. (“Cerberus”) purchased a set of hospitals in Massachusetts, placing ownership in a newly created entity, the Steward Health care System (“Steward”).Footnote 23 The initial deal took place in 2010, and Steward agreed to be closely monitored by the Massachusetts government for five years.Footnote 24
In 2016, shortly after the monitoring ended, Steward sold the underlying real estate owned by the hospitals to MPT for $1.2 billion. Cerberus immediately used $484 million of that for a dividend to shareholders, even as the financially stressed hospitals were now responsible for new lease payments.Footnote 25 In 2020, after the hospital group rapidly expanded from eleven to thirty hospitals, Cerberus was bought out by a physician group who funded the purchase with a $335 million loan from MPT.Footnote 26 There were many other subsequent complex financial arrangements where hundreds of millions of dollars in value were pulled out by various investment companies, saddling the hospitals with increasing and complex debt obligations.Footnote 27 On May 6, 2024, Steward filed for bankruptcy protection “reporting over $9 billion in liabilities,Footnote 28 $6.6 billion of its reported liabilities . . . [were] long-term lease liabilities owed to Medical Properties Trust.”Footnote 29
Much of that $9 billion was not used for providing health care. Looking at congressional testimony, witnesses gave numerous reports of quality plummeting after Steward purchased the hospitals, especially after payment obligations increased due to the financing mechanisms being used.Footnote 30 Detailed testimony reported many preventable patient deaths due to lack of providers or resources, as well as unpaid health care providers and unpaid medical supply companies.Footnote 31 The people doing the actual work were not being paid,Footnote 32 the people providing actual supplies were not being paid,Footnote 33 and patients were receiving terrible or no care.Footnote 34 It reached the point in some Steward hospitals that the Centers for Medicare & Medicaid Services ("CMS") threatened to refuse to pay for Medicare patients to be treated there because the hospitals presented a danger to Medicare beneficiaries.Footnote 35
It is rare to have the specific numbers that we have in this case study; private equity firms (and similar investment companies) have limited reporting obligations, and the various financing arrangements are complex and opaque.Footnote 36 However, even without an organized and coherent methodology for tracking this money, studies show that the Cerberus case is not an outlier, but is, rather, an example of the problems private equity is causing to the health care financing system.Footnote 37
While many states and the federal government are considering or enacting legislation to constrain financialization in health care,Footnote 38 legislative action is likely not sufficient absent a clear ethical framework that convincingly shifts the burden of justification onto those who profit. Those who profit from financialization voluntarily enter the health care market with a business goal of making money in a way that does not provide care.Footnote 39 Absent a persuasive justification showing that benefits to patients offset the foreseeable harms they cause, taking money from this health care system in this way is ethically wrongful and ought not occur. Our system of accounting methodologies should identify these profiteers and require them to present these justifications, rather than inadvertently assist them in masking financialization’s harmful impact. It ought to also clearly track the profit and subsequent strain on resources.
III. Ethical Duties Accompanying Financialization in Health care
When a company seeks investment income or seeks to profit from manufacturing goods and chooses to do this work in the health care field, it has decided to voluntarily enter a field where its business decisions have foreseeable effects on people who are sick and injured and in need of care, all of whom will eventually die. This frailty is an inescapable part of the human condition, but it plays a particularly pointed role in the background conditions accompanying any work that relates to health care, where human frailty is the underlying reason for the field. The importance of how patients are treated is evidenced by the stringent professional ethics codesFootnote 40 that recognize the vulnerability of patients and the ethical ramifications of care provider behavior.
A profit seeker’s choice to participate in this field should be accompanied by ethical duties because of the potential ramifications of pricing and profit-seeking behavior in this field. These ethical duties ought to both prohibit certain types of behavior and require persuasive ethical justifications for others.
There are two specific ethical obligations relevant and discussed here. First, the high stakes of people’s interactions with the health care system give rise to the potential for tremendous exploitation, as people will likely pay any price for medical care they desperately need.Footnote 41 Participants in the healthcare system are ethically required to not behave in an exploitative manner, a duty consistent with the overarching ethical requirement that all people refrain from exploiting others.Footnote 42 In health care, where dramatic vulnerabilities are more readily exploitable, it is important to explicitly consider the real possibility of causing harm and minimize this risk by designing an ethical analysis that leads to understandable duties for appropriate behavior.Footnote 43 Second, both pricing decisions and other forms of profit seeking have foreseeable negative downstream effects because they reduce available resources for everyone in the system; these decisions ought to be made with the understanding that the profit sought must ultimately be defended within ethical parameters.Footnote 44
Not considering these issues is an ethical choice. Structuring a system where people have the power to make unethical decisions is also an ethical choice. This article identifies these ethical moments and calls for a specific structure for approaching them.
One can create a coherent, ethical, and internally consistent approach to profit seeking in the United States health care financing environment, but it requires both a reordering of what counts as health care spending and a reordering of the ethical obligations we place on those who profit in any way from the system. This is why accounting methodologies, and the law underpinning them, are relevant here.
We have done much work to achieve a modern understanding of social justice theory and social science research. Consistently, both research and theory show us the limits of competition and free markets to correct health care resource misallocations in our financing system,Footnote 45 yet we have not centered this understanding in our relationships with those holding primarily financial roles in the health care system. We inadvertently privilege the financial wellbeing of rent seekers and price setters over the patients the system is meant to help; we do so by not tracking money spent on profit-seeking behavior and asking profiteers to get paid less money — even as we ask others in the system to do more with less.Footnote 46 This is ethically insupportable.
Much of the money that flows through the health care system goes towards financialization schemes such as rent seeking, prices that exceed a reasonable value of the good being paid for, and intentional manipulation of programs meant to subsidize care for vulnerable populations. Even though this is technically money spent in the United States health care system, it is not money spent on health care, and we should be more careful about this distinction.
As we adjust how we account for the money going through this system to clearly identify these categories, we ought also to invert the hierarchy of where we commonly look for savings, first focusing on those who provide no or little direct care rather than on patients or doctors. Asking patients and doctors to save money is stressful and potentially harmful.Footnote 47 Reducing or eliminating profit streams that are not adding anything meaningful to the health care system is a more attractive target of cost savings. Given the foreseeable negative downstream effects of financialization, the ethical justification for this flip is even more persuasive.
One who intentionally enters the health care marketplace because one seeks to profit from it while providing no meaningful care to patients, ought to have a heavy burden of justifying why they are entitled to any money from that system. If the reason we put money into the health care system is to provide health care, money that does not do so is being improperly spent. It is important to remember that one can seek profit in any industry, and the health care system does not owe a profit seeker any sort of opportunity by default.
One can readily imagine a sufficient justification for many common financial transactions. Renting an office building, loaning money for a new wing to a hospital, etc., could be done in a manner that is not inherently problematic, and could be justified as helping providers provide care. The justification is that the transaction or the actor provides a good that, in balance, is worth the foreseeable negative effects on access and care that come from the pricing and/or profit seeking behavior. Having a burden of justification is not a subterfuge for preventing all transactions, it is meant to function as a tool for preventing ethically impermissible transactions.
The typical private equity firm investing within the health care field requires this analysis. Though often promoted as beneficial for health care because of developing efficiencies while freeing up capital for the acquired health care provider,Footnote 48 the mere fact that these firms commonly justify their role in health care by asserting these claims implies an inchoate understanding of some ethical burden, or at least a recognition of the problematic optics of profiting from health care without even a pretense of improving outcomes.
Imposing an ethical duty on those who seek to profit from the financialization of health care allows one to rebut private equity’s justifications by asking for an explanation as to why these ‘efficiencies’ are sufficient as a justification for the foreseeable harms caused by the financial transaction. One can also ask for evidence that any such efficiency (the first justification) is achieved, which seems hard for these firms to argue persuasively. As has been cited throughout this article,Footnote 49 numerous persuasive studies show poorer outcomes, increased provider burnout, and increased patient costs after private equity purchases a health care institution.Footnote 50
The second justification, the release of capital, is perhaps more interesting. The use of the capital that is released through the financing mechanisms of purchase or sale leasebacks, etc. is not constrained, so it does not have to be used for anything related to the mission of the provider or hospital.Footnote 51 As in the case study about Steward described above,Footnote 52 the money often funds a significant dividend for shareholders of the private equity firm that designed the financing mechanism that collected the money. The practice or hospital is left with the debt but often little of the money the debt is evidence of. It is shocking that such an intentional wasting of health care resources has been allowed. Requiring a justification related only to the provision of health care would make such a transaction insupportable. It could also function as a reason for prohibiting taking the value of a health care institution’s underlying assets away from it to profit those disconnected from that institution.
Unreasonable price setting also comes with foreseeable harms. There are people who cannot pay for care at that price and so go without. When the price is paid, the unreasonable price improperly drains resources from a system that has finite resources. This later harm is experienced by all persons who must function within a system that has fewer resources available to provide all types of care.
Those who set prices are looked at differently in this ethical framing than how they are commonly viewed, with far less privilege and a strong duty of justification for every choice they make.Footnote 53 The health care system is intimately concerned with people who are passing through risky, painful, and stressful stages of their life. Its pricing mechanisms should not allow the ultimate threat of untreated illness or injury to weigh into calculations. The goal ought to be creating a system where prices reflect fair reasonable payment for labor and produce fair returns for taking financial risks when pursuing innovation, not one with the potential of extortion in the face of threats to one’s very life.
Calculating prices for health care based on what would happen if care were not provided is akin to calculating payment for a barrel of water in a drought. You must have the water to live, so of course any trade of any value is rational. But it is better to build a system for delivering water in an affordable and reliable manner.Footnote 54 Calculating a price for that water in a manner that internalizes the exploitative power one has over people who would otherwise die of thirst is absurd. If we assume that exploitation is unethical, a properly functioning water distribution system ought to be constructed to fairly pay for the labor and intellectual prowess that is involved in providing water; the primary organizational goal would be rational and efficient water distribution, as well as avoiding the potential for exploitation.Footnote 55 Seizing control of the water supply and threatening to kill someone by not allowing them access is, at best, exploitation and, at worst, murder.Footnote 56
Nicholas Bagley discusses something similar looking at health care from a public utility perspective and describing “an affirmative obligation … to be reasonable in dealing with the public[,]” particularly when actors “serve[] an important human need and have the market power to exploit consumers … .”Footnote 57
We do utilize methods for incorporating rational and ethical concerns into pricing, primarily through cost effectiveness analysis. Scholars have done good work examining this process and theorizing methods within it to achieve better results. For example, Govind Persod, in Pricing Drugs Fairly, devises a method for correcting overpricing, recognizing, and pushing back against, market exclusivity problems and stark dependance that patients have on the drugs they need.Footnote 58 His theory, in relevant part here, is that pricing ought to be fair in relation to the social value of a drug.Footnote 59
However, comparative effectiveness analysis for pricing purposes brings these issues into the system at the wrong place. Conceptions of value and benefit ought to be implemented at a structural level as well as at a specific comparative pricing moment, where we do such an analysis to push back at the prices drug companies are seeking.
Comparative effectiveness asks us to consider the cost of an illness and the savings that a treatment offers us. We consider a rational price for the treatment in light of how much money, suffering, and life years it potentially saves us. We ought not be framing the question this way, as doing so internalizes our acquiescence to negotiating with highway robbers. Embedded into our current framing of the best price is the possibility of going without treatment if a price cannot be agreed upon.
Even in a comparative effectiveness discussion where a powerful purchaser is negotiating pricing, the manufacturer needs to be cajoled into an agreement even as it holds people’s very lives over their heads. The current system gives companies the power to walk away, with potentially devastating effects on health care outcomes, because barriers to entry make it implausible that another entity can take their place.Footnote 60
We are beginning to formulate methods for demanding a more rational stance when negotiating prices.Footnote 61 The overarching ethical goal should be fair and reasonable pricing, stripped of the threat of preventable death and suffering. Even if this is not plausible given our current system of market exclusivity and steep barriers to entry, we should certainly be acknowledging the threat for what it is and publicly air its wrongfulness.
All actors in health care financing are responsible for the ethical ramifications of how they behave, morally culpable for causing harm when they cause harm. We should require these actors to defend the harms they cause within a framework that sets expectations of ethically proper behavior and transparently discusses what is being balanced when prices are set.
Companies working and setting prices within this system come to the industry by choice, voluntarily entering a system where their decisions have profound ethical implications. Expecting ethical justifications for the effects of these decisions is clearly not radical. It is more extreme to accept the harms to people’s lives and health caused by extreme pricing as somehow natural (rather than constructed) and seek solely to minimize those harms after the price has been set.
Another way to describe this flaw comes from examining the concept of value as it applies to health care and then looking carefully at how financialization fits within it. As Michael Porter wrote, “[i]n health care, value is defined as patient health outcomes achieved relative to the costs of care. It is value for the patient that is the central goal, not value for other actors per se. In a well-functioning health care system, the creation of value for patients will determine rewards for all system actors.”Footnote 62
If this definition holds, value-based purchasing is meant to enhance a patient’s outcome relative to the cost of care.Footnote 63 Furthermore, if someone is currently benefitting from the health care financing system but does not create this exact type of value, they ought not have any rewards from this system. This logically implies that, as a necessary condition of participating in the system, all participants must be able to explain how they increase value for patients.
I would argue that it goes further. Given the ethically fraught implications of a health care system with scarce resources, participants have a normative duty to clearly show they increase value in meaningful ways. Value ought to be present before someone can profit and the degree of value ought to be tightly related to the amount of profit.
Using the lens of value allows us to focus on the concepts of over-valuing and undervaluing. Within the definition of value given above, a participant in the system is over-valued if it is rewarded in excess of the value it brings to patients. While achieving numerical clarity to answer this may be difficult, the logical claim is tight. The creation of value determines the reward.Footnote 64 So, it is possible to infer that first, some value is required for there to be any reward, and second, the reward is calculated proportionally to the value.
We currently pursue value in interactions between and among hospitals, providers, and patients, while not directly focusing on these other large players in the system as described in this Article — that ought to change. This value framing identifies the requirement that any participant in the health care field must bring value to patients to profit. The definition of value, and the limits on it, however, must be constrained, likely with some form of the public utility argument given above, so that it does not become another opportunity for exploitation of the life-or-death nature of health care. Preventing death and suffering is extraordinarily valuable but is also the purpose of the system.
Finally, given the importance we place on health care spending in any given year, the method for getting that number matters. If that methodology masks the impact of the financialization of the health care system, it distorts our decision making about health care financing reform. We consistently burden patients and providers by asking them to do more with less without making sufficient efforts to minimize that burden by protecting the assets that are potentially available.
By folding the costs of financialization into the overall costs and per capita costs of the health care financing system, we are building that profit on patient’s and provider’s backs, calling on them to justify high costs and shoulder a greater share of this burden. When you look to the patient and to the person buying insurance for savings, it implies they need to pay more, that they are somehow getting more than they ought to, and so they are appropriately the first place to look for constraining overall spending. When we ask providers to be more efficient, to see more patients and still maintain quality, we are saying that they are currently doing something wrong, taking more than their fair share of resources and time.
The folk singer Jesse Welles has a song that begins “If you worked a little harder, then you’d have a lot more. So, the blame and the shame’s on you for being so damn poor.”Footnote 65 In this song, he describes our perception of poverty as caused by failures perpetrated by the person with limited resources.Footnote 66 This view of poverty is inaccurate; the way our society is constructed makes it difficult for people to ‘work[] a little harder’ so they aren’t so poor.Footnote 67
Welles’ lyrics are directed at poverty and how we blame people who are living in poverty for what society does to them. This same dynamic occurs in health care financing, where we seek savings from patients and providers even as we realize many other people profit in ways described in this Article. Focusing on these people to fix cost problems implies the system would not be this expensive if patients and doctors did not act the way they do. For example, there have been repeated claims that patients are likely to seek care they do not need when the cost is low.Footnote 68 We ask patients to carry more of the risk of insurance by having extremely large deductibles under the theory that having ‘skin in the game’ will foster better choices by patients.Footnote 69 This rests on a strange construct that somehow people without medical training are the ones who ought to determine when care is necessary and need powerful financial incentives to constrain them.Footnote 70
Unsurprisingly, even as we have public health campaigns seeking to educate people about the symptoms of emergent conditions such as heart attacks and strokes,Footnote 71 financial incentives to delay care such as high deductibles have a powerful, negative impact on patient’s rates of seeking care.Footnote 72 Given the downsides of these efforts to save money at the patient-provider level, we should also look to those who profit from financialization for savings.
IV. Accounting Methodologies and Rhetoric
Ensuring that we maintain focus on identifying and minimizing spending that does not provide health care serves purposes beyond ethics, justice, or fairness: it increases accounting accuracy, allowing policy choices to be made from a more informed perspective.Footnote 73 By failing to do this, our current system distorts internal discussion and international policy making. We recognize that, according to our accounting principles, we spend more on health care, in total, than other countries do, we spend much more per capita than other countries do, and our returns on this investment are persistently poor.Footnote 74 We constantly confront evidence of poor outcomes through multiple lenses.
Internationally, we have measurably worse outcomes across the board, particularly when compared with countries of similar financial robustness.Footnote 75 These problematic outcome statistics include overall life expectancy,Footnote 76 maternal fetal morbidity and mortality rates,Footnote 77 and mortality from treatable causes.Footnote 78 Within our country, we also see wide and indefensible variables in outcomes and other measurements of quality, where the socioeconomic identity,Footnote 79 race,Footnote 80 gender,Footnote 81 wealth,Footnote 82 education level,Footnote 83 Body Mass Index,Footnote 84 and a myriad of other seemingly irrelevant qualities of a patient coupled with their geographic locationFootnote 85 often serves as a more reliable predictor of outcomes than the immediate health problem they are facing.Footnote 86 These outcome differences often persist even though the per capita spending (as we currently calculate it) for these patients may be equal to or higher than what is spent on someone likely to have better outcomes because of having more privileged qualities.Footnote 87
The problem seems exceptionally puzzling and complex when the number of how much is spent is accepted at face value; if money buys access to health care, and we are paying that money, why do we fail to buy good outcomes? If we throw money towards treating illnesses in vulnerable populations, why are we failing to buy good outcomes there?
Perhaps we need to consider the possibility that we may not spend that much money on health care, we may not actually spend more than every other country per capita on providing care, and in fact spend far too little on providing care across our system — particularly in areas where the outcomes are poor — and this lack of spending contributes to our poorer outcomes.
To investigate whether we may be spending too little would require us to consider that our methods of calculating health care spending are incorrect when considered in light of how the health care financing system in the United States is constructed. The financialization of health care coupled with our current accounting methods may be distorting discussions about resource allocation. The political debate would likely be very different were one to acknowledge that people are going without necessary, timely care so a private equity firm can declare a dividend, not because health care resources are too scarce to go around.
It is not unprecedented to raise a claim that an accounting process is incorrect and may be doing harm, though these claims generally arise within the profession of accounting, and not as often outside of that specific field.Footnote 88 Separate from the concerns raised in this Article about the propriety of rent seeking, etc., people outside of accounting tend to accept that the numbers presented as a result of compliance with accounting methodologies tell us something true that they are not capable of doing, as though it is a simple question of counting countable objects. This distortion occurs, in part, because of the powerful rhetoric that accounting contains.
If one was simply counting a barrel of sixty-five apples in a careful and reliable way, one would know something specific and tangible: there are sixty-five apples, so sixty-five people could each get an apple. Health care accounting is presented as if it were simply counting apples, but it is not. Accounting standards (the terminology used to describe agreed-upon accounting methodology) are negotiated and subject to routine change, with the understanding that the changes will alter the final numbers.Footnote 89 The discussions in these negotiations often contain explicit recognition of the ethical and sociological values that are embedded in the adopted rules.Footnote 90 Furthermore, within accounting, the outsized power of the rhetorical content of these numbers is widely recognized.Footnote 91
The communications of accountants to the non-accounting world — such as our national yearly health care spendingFootnote 92 — have both potent rhetorical content and risk of doing harm. The rhetorical weight leaves numbers vulnerable to misunderstanding and casual usage that is not necessarily tightly connected to what the numbers reflect. Within academic accounting, there is common and open discussion about the potency of this rhetorical communication and its flaws.Footnote 93 For purposes here, it is enough to recognize that the numbers used in accounting have a rhetorical content which implies they express a true statement of fact, whereas in reality these numbers are evidence of significant compromise and value debates and are ultimately changeable.Footnote 94 Because accounting methodologies reflect these choices, they are instruments of communication about values that are imbedded in those choices, far more complex than simply counting apples.
The process of adding up how much we spend on health care is a method of calculating economic statistics used to make policy. These numbers are used, for example, to compare us to other countries,Footnote 95 to tell us how much we value health care,Footnote 96 and to shame us with how wasteful we are.Footnote 97 They are rhetorically weighty.
While gross and per capita health care numbers have not been subject to close criticism regarding their capacity to cause harm, similar forms of statistics have been elegantly analyzed as political artifactsFootnote 98 and as error laden constructs with the potential to cause harm, constructs that often serve to mask outright dishonesty and other forms of subterfuge by those seeking profit while manipulating policy discussions.Footnote 99
An example of the faultiness of these statistics, and of how they can be used to mask problems within a society, particularly through comparison with other countries, is employment statistics.Footnote 100 Daniel Mügge makes a persuasive argument that the methods for collecting employment statistics spring from white men working for factories in developed countries.Footnote 101 The numbers have no mechanism for reflecting exploitation ranging from lack of bargaining power to outright enslavement, though it is obvious these drastically alter employment statistics in terms of hours worked, productivity, the cost of labor, etc., as well as raising deeply problematic ethical issues that are masked by the anodyne numbers employment statistics provide.Footnote 102
If we look at the governmental communications about how much is spent on health care, you see language that communicates high levels of confidence in the numbers being given, particularly in the United States.Footnote 103 Confidence in the value of the numbers makes sense, on one hand, because it is premised on compliance with accepted methodologies used for determining these numbers. It is inappropriate, on the other hand, if one acknowledges the known limitations of what these numbers reflect.
In the United States, the Center for Disease Control (“CDC”) web page offers this statement: “[the United States] health care spending grew 7.5 percent in 2023, reaching $4.9 trillion or $14,570 per person. As a share of the nation’s Gross Domestic Product, health spending accounted for 17.6 percent.”Footnote 104 The number $14,570 is precise and crisp. The paragraph above that number acknowledges that the National Health Expenditure Accounts (“NHEAs”) are estimates but gives no further context or discussion of the effect of it being an estimate.Footnote 105 Instead, the next sentence claims that NHEA measures these expenses and collects data to do so.Footnote 106 There is no further discussion of limitations on the validity of the numbers.Footnote 107
Shifting from the problems and risks inherent in accounting, consider how the accounting processes for calculating health care expenditures mask financialization. Consider single payer health insurance for a moment, particularly how we calculate its prospective cost in the United States, and the errors these calculations contain due to the problems described in this article. In a 2020 article, Cai and Ostrer et al. did a systematic review of several economic analyses of these programs and found that the majority of the studies showed single payer plans would generate cost savings.Footnote 108 These studies all assumed prices would go down, due to government bargaining power constraining prices, and utilization would go up, due to people accessing necessary care because cost impediments would be removed.Footnote 109 The Congressional Budget Office has also done similar scaling of these proposals, finding that rates would go down, utilization would increase, and resources would be strained, concluding that the overall costs of health care would go down while government spending would increase.Footnote 110
The general tussle between optimistic and pessimistic assessments of the overall cost of such a system seems to come from differing perspectives of the impact of getting access to care for those who currently do not have it, a somewhat ghoulish acknowledgement of the limitations of our current system.
The boundaries drawn on what is counted in the system include doctors, hospitals, and drug costs, as well as anticipated patient needs, but do not include any financing mechanisms or the known effect these mechanisms have on provider behavior.Footnote 111 Given how much data we have showing many of these mechanisms cause increased utilization, upcoding, lower quality, bankruptcies, employee dissatisfaction, etc.,Footnote 112 even without tracking the net loss of money from a strained system, it is problematic to not account for how constraining these problematic investments could change the net costs, and to not address whether any specific plan has mechanisms to do so.
Notably, absent specific mechanisms, it is likely incorrect to assume a single payer system would constrain these participants or their profit, which could substantially change current financing calculations. The UK has national health insurance and increasing value extraction by private equity, so these are not mutually exclusive.Footnote 113 A May 2024 article collecting studies of the effect of private equity on quality and access shows similar effects of private equity investment to what has occurred in the United States.Footnote 114 Allowing private companies to provide care to the National Health Service (“NHS”) patients has been an undercurrent project of Tory politicians for some time.Footnote 115 Tory governments underfunded NHS, which, combined with COVID, led to increased wait lists, which increased public acceptance of private firms being used, even by Labor governments, to reduce the waits.Footnote 116 Private equity, not surprisingly, has been lobbying for this change and is a primary financer of the private institutions providing the care.Footnote 117 Labor’s shadow health secretary Wes Streeting acknowledged that if their party were in the majority, they would likely use these companies to drop the wait lists and that, when it occurred, he would “be pretty furious at the costs involved, because it shouldn’t be the case that because Tory governments run down the NHS, we have to spend more taxpayers money than would be necessary in the private sector because we haven’t sorted out the public sector.”Footnote 118
We see in this story from the UK that failing to account for financialization leads to significant flaws in the premises underlying the debate about altering the health care financing mechanisms in the United States. It is difficult to have accurate policy debates and consider amending or revising financing mechanisms properly without grasping the extent to which the background pressures of financialization distort our current system and create unknown risks for distorting any new system. Because there is so much money to be made, these profiteers will find their way into any system and therefore must be looked at directly and planned for. Accounting, though it currently helps mask these profiteers, could change to help us achieve this improvement.
It is challenging, certainly, to tease out how this ought to be accounted for, but that does not change the definitional problem. Doctors being paid for providing care is a different category of spending than investors being paid for structuring a deal. Accounting, in turn, ought to be sophisticated enough to properly account for this categorical difference. Otherwise, any number that purports to show how much the United States spends on health care per year, or how much it spends per capita, is misleading.
If one is persuaded by the argument presented here, that some types of spending within the health care system are not being spent on health care, per se, but are being extracted through the financialization of health care, this number ought to be corrected. It may help to consider this as a formula, one which shows the algebraic relationship between financialization of health care and the actual cost of health care.
This formula shows how to conceptually cordon off the costs of financialization, as distinct from the costs of providing health care. N is the amount we currently claim to spend on our health care system (and N/# of people in the United States is the per capita amount).Footnote 119
Having an algebraic method of expressing how financialization distorts N is necessary for two overlapping reasons. First, N is incorrectly portrayed as a statement of how much money the United States spends on health care. Instead, N tells us how much money flows through the system, whether it is spent on health care, methods of financialization, or other costs.Footnote 120 Second, given the potent rhetorical communication that N represents in policy and public debates about health care financing, showing the logical relationship between financialization of health care and the remaining true cost of health care allows for a more informed discussion about who ought to be receiving the money that flows through the health care system.
This formula can be approached in two manners. In both, N is what we spend on our health care financing system and HS is what we truly spend on health care. The first is as a discount rate, where one reduces N by the percentage of all cost that goes to financialization, the F rate, to get HS. For example, if data showed that the effect of F was to increase costs by twenty percent, we would multiply N by .83 (the eighty percent of costs that go towards health care) to find HS. The second is simple arithmetic, N-F=HS, where F is the money going towards financialization.
F in both scenarios is the sum of R (rent seeking costs), P (unreasonable price setting costs), and G (money lost to gamesmanship), though these are not finite categories and likely often overlap.
Much of the recent data about the problems with financialization have shown proportional increases, for example, that when private equity buys a practice, billing increases by a certain percentage.Footnote 121 It may be, then, that N is reduced by a percentage, rather than by subtracting a specific number. So, if R, P and G are percentage increase in costs due to private equity, we would calculate a multiplier that would give us a discount rate. However, were accounting and reporting rules changed so that there were more accurate numbers available as to what was truly being spent in these areas, proportionate discounts would not be necessary.
For those familiar with torts law, the idea of using a formula to show the relationship between concepts when seeking to find the scope of a duty is familiar, given Learned Hands’ Caroll Towing formula, where, with regards to the duty of care for a moored boat, he found
the owner’s duty, as in other similar situations, to provide against resulting injuries is a function of three variables: (1) The probability that she will break away; (2) the gravity of the resulting injury, if she does; [and] (3) the burden of adequate precautions. Possibly it serves to bring this notion into relief to state it in algebraic terms: if the probability be called P; the injury, L; and the burden, B; liability depends upon whether B is less than L multiplied by P: i.e., whether B > PL.Footnote 122
The Learned Hand formula is used to determine what is reasonable by showing the relationship between individual or societal burdens and the probability and gravity of foreseeable harms to others.Footnote 123
A central issue in Caroll Towing was the likelihood and severity of damages.Footnote 124 Here, if the goal is to determine the true cost of financialization within the health care system, and that this is done with an eye towards formulating a duty such that those who profit from financialization must justify that profit in light of foreseeable harms it causes, the formula has to change to look outside the immediate calculations already described and include these damages.
Presuming, as argued above, that financialization causes foreseeable harms and increases the risk of harms occurring, that cost ought to be included. To accurately describe N, as it is currently calculated, then, it would be N=HS+F+C, where C is the societal cost of the harms caused by financialization that are in addition to whatever money leaves the health care system due to specific incidences of financialization. A simple example of this would be the additional cost of treating an advanced disease that was not treated early due to excess price setting for an earlier stage treatment. To calculate what we spend on health care, excluding costs spent repairing the harms caused by financialization, then, we get N – (F+C) = HS.
Considering the cost of health care without any excess spending generated by the foreseeable harms caused by financialization allows us to understand what health care costs would be without financialization. The formula also allows us to fully appreciate the harms that financialization causes and increases the burden of justification on those who benefit from this type of behavior since the full cost of it is now placed on their side of the ledger.
V. Conclusion
There are flaws in health care accounting, and some of those flaws are currently helping to mask the financialization of the system. By not counting money that flows to those who are profiting from financialization, they are absorbed into the overall costs, and the impact is disseminated across large numbers of individual patient bills, rather than being calculated as a distinct and likely unnecessary burden on the scarce resources we have for health care spending. By not identifying the excess costs generated by the harms caused by financialization, we further mask how damaging these behaviors are.
Those who benefit from this profit ought to be identified and their profit calculated. They also ought to justify their claims for this money, given the foreseeable harm that is caused by extracting money from this system. People go without necessary care or suffer significant financial struggles and at least some of that suffering is for the purpose of supplying other people with a profit, even as they give no health care in return. Accounting has been coopted so that it functions as a shield for those who extract profit, rather than as a tool for holding all participants properly accountable.
The law is a potential tool for correcting these problems. Ethical rules that constrain providers is another possible tool. Any changes that are proposed would be more effective and the arguments in favor of them more persuasive if we adopt a clear ethical statement of duty regarding profit in health care and alter accounting methods so that we have a clear picture of who profits and of how much they make.
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