Hospitals not keeping up in healthcare profit race


As you'll see elsewhere, this has been a pretty good year for healthcare companies--but much better for biotechs, pharmas and medical device makers than for providers. 

A recent analysis by MarketWatch concludes that healthcare companies on the S&P 500 list did very well over the last 10 years, with biotechs, medical devicemakers and pharmas, in particular, seeing spectacular increases in profits and sales. Meanwhile, the only hospital group on the list, Tenet Healthcare, expects to see a drop in profits for the same period.

Stack Tenet up with other providers not on the list, and the picture is much brighter, with profits climbing four-fold, but that's way behind the group leaders. And within the larger group of hospital and healthcare providers analyzed by MarketWatch, hospitals actually saw profit growth that exceeded that of insurers.

That being said, my instinct is that with the products side of an industry posting stratospheric profits, while service providers lag, it's bad for the industry as a whole. I'd argue that the big difference in market power between these players has serious implications for the delivery of care.

Hospitals, and other providers in the delivery end of the system, do everything they can to build profits, of course. The recession, meanwhile, has pushed hospital CEOs to make cuts they'd probably considered imprudent or even impossible years ago. Still, hospital leaders can't shave costs forever. Some of the profits in the broader healthcare industry have to shift a bit if the system is to be sustainable. Besides, why should it be higher-value activity to build a machine or manufacture a drug than deliver a skilled service?

Unfortunately, there's no easy way to address this problem, save perhaps hospital companies were to somehow buy pharmas or medical devicemakers to reap their profits. But the reality is that unless other industries cross-subsidize actual hands-on care in some way, the system is wobbly at best. If nothing else, hospitals will ultimately stop being able to buy these high-margin products if manufacturers control too much of the capital. Arguably, that's been the case to some extent during this recession, and it could get worse.

Readers, do you think there's any realistic way to address this imbalance? Write to me and tell me what you think. - Anne

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