Healthcare corporatization receives excessive negative attention

Exasperated by the continuous escalation in healthcare expenses, many Americans believe they know who’s culpable for the escalated cost of pharmaceuticals, the closure of local hospitals and clinics, and the consolidation of their preferred doctor’s practice with a rival: profit-driven entities and private equity firms.

This increasing trend in the U.S. is referred to as corporatization. Investors provide crucial funding to pharmaceutical and biomedical companies, healthcare establishments, and practitioners to assist in drug development, cover rising costs, and enhance efficiency and scale. Yet frequently, critics argue, the emphasis on profit results in diminished quality, limited choices, and ever-rising expenses for patients.

In a recent article in the New England Journal of Medicine, co-author Amitabh Chandra contends that private funding in the healthcare system addresses a vital need that others, like the federal government and nonprofits, cannot fill.

In this modified dialogue, Chandra, who directs the Malcolm Wiener Center for Public Policy at Harvard Kennedy School and serves as the Henry and Allison McCance Family Professor of Business Administration at Harvard Business School, stated that contrary to popular belief, the pursuit of profit in healthcare doesn’t necessarily imply worse conditions for patients.

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What is corporatization?

Corporatization is fundamentally an arrangement between a medical entity and investors. The entity gains funding that can be allocated for innovative technologies, improved facilities, research, or competitive remuneration.

In exchange, investors anticipate a portion of the profits. This portion may be minor or significant — 1 percent, 10 percent, or even 50 percent — depending on the agreement’s conditions. At its essence, corporatization “unlocks” capital for advancement, but it does so in a manner that emphasizes profits, as investors can relocate their funds elsewhere if returns are unsatisfactory.

You assert that private funding in healthcare isn’t inherently negative. What are some advantages beyond just cash infusion?

The arrangement between an investor and a medical entity is voluntary, clearly benefitting both parties. However, the true query is whether it serves society — and that’s not always clear.

The primary metric is the impact on patient outcomes when corporatization happens. In certain sectors, like nursing homes, the track record is dismal. Here, some private equity firm operators may reduce staffing and compromise quality to enhance profits, linked to increased patient mortality.

However, in other fields, corporatization has produced genuine benefits. In vitro fertilization (IVF) stands as a prime example. As IVF is capital-heavy, larger corporate entities can leverage scale, data, and investment in technology to elevate success rates. Patients benefit because quality is quantifiable (pregnancy outcomes), and clinics directly compete on performance and cost.

Similarly, within the biopharma sector, private funding has been crucial for covering the substantial costs associated with drug development, facilitating the creation of therapies that might not otherwise be developed.

Thus, the advantages of corporatization extend beyond simply “more funds,” dependent on whether the investment is utilized for scaling up, refining processes, or encouraging innovation in ways that genuinely enhance patient outcomes.

Given that healthcare and scientific research & development are so costly, isn’t conflict between market incentives and health results, between patients and profit, unavoidable?

I don’t believe so. The “inevitable conflict” perspective presumes that whenever profits are involved, patient welfare is compromised. But consider a scenario devoid of profits — would patients be inherently better off? The reply is no.

A substantial portion of healthcare relies on improving quality and promoting innovation: treating a heart attack patient more effectively this year compared to last, producing new medications, or utilizing superior technologies. All of this requires funding, and profits are what draw that funding.

It is indeed valid that people are concerned — often justifiably — about the extremes of for-profit entities. Yet, from that, some deduce that the mere existence of profit must be detrimental to patients. That’s an error.

Even a solo physician in private practice seeks profit, and without it, they will close down. Hence, it’s simplistic to proclaim that corporations making profits are bad while individuals pocketing profits is acceptable.

The genuine challenge lies not in profit itself but in effectively aligning profits with value for patients. In areas like IVF or biopharmaceuticals, profits and patient results can positively influence one another. In others, like nursing facilities, misaligned incentives can lead to adverse effects.

In your perspective, why has corporatization been advantageous in some areas but not in others, such as nursing homes?

A significant part of the explanation revolves around how observable quality is. Take IVF clinics: Their promise is straightforward — fertility. Patients can readily ascertain whether treatment results in pregnancy, and clinics directly compete on success rates and pricing.

Pharmaceuticals are more intricate, but here quality is supported by regulatory measures. While patients may not independently evaluate a drug, FDA approval ensures a layer of trust that assures quality.

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indicates that it is reliable and efficient, and medical professionals serve as trusted mediators.

This amalgamation of oversight and regulation aids in aligning profits with patient results, which is why corporatization has fostered innovation in pharmaceuticals.

In contrast, nursing facilities lack transparent, reliable quality metrics. Families find it difficult to evaluate the standard of everyday care, and regulatory bodies are relatively ineffective. This opens opportunities for profit-focused owners — particularly private equity firms — to reduce staffing and compromise quality, sometimes even in ways that heighten patient mortality.

In the absence of dependable measures or enforcement, corporatization in this domain tends to harm rather than benefit patients.

Isn’t the federal government more capable than private equity to finance this type of work, especially research and development, which frequently requires substantial investment over extended periods with no assurance that a product will succeed, receive regulatory approval, or thrive in a saturated market?

No. Governments, including the U.S., have demonstrated ineffectiveness at maintaining long-term investments.

The NIH budget is approximately $35 billion, which is vital for supporting fundamental science, but it pales in comparison to what is necessary. In contrast, the pharmaceutical sector allocates around $275 billion worldwide each year for R&D. That level of expenditure far surpasses what governments, nonprofits, and foundations can sustain or are willing to commit.

Without private funding, the large-scale, high-risk clinical trials and product development that introduce new treatments to patients simply would not occur.

Government funding also brings along bureaucratic challenges, fluctuating priorities, and budgetary unpredictability — not an ideal combination for the consistent, long-term investment required for drug development. The government plays a crucial role in initial research, establishing the scientific groundwork.

Here too, as the current halt of NIH grants exemplifies, it struggles to provide consistent funding, which is essential for fostering exceptional science. To clarify, it’s not only the U.S. government that struggles with long-term investments in science. Governments of many affluent nations also show a substantially poorer track record.

Why is this occurring?

Ultimately, it is a decision. Ideally, the government should allocate more funds because the advantages of foundational scientific research benefit society as a whole. Take Alzheimer’s disease, for instance: Creating a genuinely transformative treatment may require 30, 40, or even 50 years. That timeframe is unattractive to private investors, which is why the government must assume a more significant role in supporting early-stage science.

In fact, despite its limitations, the U.S. government is the largest global funder of fundamental biomedical research. The issue is that governments everywhere encounter structural constraints: they are not well-equipped for long-term commitments that don’t deliver immediate discernible benefits to voters. Other nations often benefit from U.S. investments, amplifying the challenge.

What actions can be implemented to obtain the advantages of for-profit investment while mitigating some of the adverse effects that may arise from the pursuit of profit?

Pursuing profit is not the inherent issue. Even nonprofit organizations generate profits; they simply do not pay taxes on them. A system devoid of profits wouldn’t necessarily enhance patient well-being; in fact, it could reduce the scale of care and squelch innovation. The real challenge lies in ensuring that profits correspond to value for patients.

The most vital step is to bolster regulation. At present, healthcare regulators are underfunded and frequently unable to oversee intricate agreements or prevent misconduct. A well-funded and independent regulatory body is essential for effective corporatization. The FDA exemplifies this: it offers reliable, science-based endorsements of drugs, which aids in aligning corporate motivations with patient outcomes.

We require similar competencies in other areas of healthcare — regulators at the Centers for Medicare and Medicaid Services, the Federal Trade Commission, and the Department of Justice who are insulated from political influences and independent from the sectors they supervise.

With enhanced quality measurement, enforcement of antitrust legislation, and the power to halt or reverse agreements that fail to generate societal value, regulation can help ensure that corporate investment broadens access, elevates quality, and stimulates innovation without compromising patient welfare.

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