The Analytical Economist; April 1994; Scientific American Magazine; by Wallich; 1 Page(s)

Times used to be good in the hospital business. "You could name your price" for services, recalls Joseph P. Newhouse of Harvard University. "It was a very nice environment." The fat years began about 1965, after the passage of Medicaid and Medicare laws that extended health coverage to poor and elderly citizens--and paid for care based on the provider's cost of delivering it. During the next 20 years, the number of hospitals run for profit in the U.S. increased steeply. But now cost cutting by private insurers and government agencies, who have been footing the bill, has begun to dry out the hospitals' cozy ecological niche. Regardless of what health care reform measures pass, most economists agree that the Garden of Eden is turning into a jungle.

According to some economists, health care cutbacks fall largely on for-profit hospitals. Nonprofit institutions have tax exemptions and other advantages that permit them to charge lower prices for the same care, says economist Jayendu Patel of Harvard's John F. Kennedy School of Government. As a result, he predicts, competition could eventually force for-profit hospitals out of the market. Indeed, Humana and Hospital Corporation of America (HCA), two companies that amassed huge chains of hospitals in the late 1970s and early 1980s, have sold the vast majority of those acquisitions in the past few years, he says. HCA, for example, has jettisoned more than 250 of its hospitals since 1987.