Hahnemann Hospital Closing: The monopolistic, government-supported residency training system meets market capitalism head on
The bankrupt Philadelphia hospital wants to sell its 550+ residency slots for $55 million
Tomorrow, on Wednesday, a bankruptcy judge will decide whether the venerable Philadelphia Hahnemann Hospital is allowed to sell its more than 550 slots for training medical residents to a local consortium for $55 million.
The Centers for Medicare and Medicaid Services has objected on two grounds:
The terms of the sale won’t allow them to recover enough money (classic bankruptcy court stuff).
The sale is illegal because Medicare’s provider agreement with Hahnemann isn’t transferrable property to bought and sold in the open market.
It’s that second point which raises profound questions about America’s system for training medical residents.
Medicine and “pure commercialism”
Paul Starr wrote in The Social Transformation of American Medicine that medicine has historically distinguished itself “from business and trade by claiming to be above the market and pure commercialism.”
Doctors have, throughout history, gone to great lengths to insist that they are removed from the pressures of market capitalism, pure in their intentions to heal, and always focused on the best interests of their patients.
[The current debate over surprise billing legislation epitomizes this tension.]
In the 1930s, the American Medical Association went so far as to state that making a profit from medical work “is beneath the dignity of professional practice, is unfair competition with the profession at large, is harmful alike to the profession of medicine and the welfare of the people, and is against sound public policy.”
Oh, how times have changed.
After years of financial struggles, Hahnemann announced in June 2019 that it would close its doors. A few days later, the hospital, which was acquired in January 2018 by private equity-backed Paladin Healthcare, filed for bankruptcy.
The most controversial part of the process was and is its auction of more than 550 residency training slots to the highest bidder: in this case, a consortium of regional hospitals and health systems, which agreed to acquire the slots for $55 million.
Residency training: monopolistic & government-supported
As Dr. Kim-Lien Nguyen wrote in an excellent piece for Stat News:
In the U.S., Medicare funds a fixed number of residency slots with direct government grants of at least $100,000 per resident — and that does not include the market value of services provided by the resident during his or her training. This amounts to about $15 billion a year in government funding for residencies.
Five-hundred fifty residents per year times $100,000 in Medicare subsidies per year equals - you guessed it - $550 million. In other words, the local consortium is offering to buy residency slots for exactly the money they would expect to get from the government over the course of one year. It’s a very, very good deal for the consortium.
But that's not all. In addition to the government support, Nguyen points out that studies of graduate medical education programs positively affect hospital finances “to the tune of $160,000 to $218,000 per resident physician.” Much of this financial upside comes from being able to bill for services provided while paying residents less than a nurse or PA would make, which they can do because, in addition to being government supported, the system of residency training is also monopolistic.
Again, Nguyen:
The labor market for residents is controlled by nonprofit teaching hospitals through an intentionally monopolistic entity: the National Resident Matching Program… This framework allows a sticky web of private governing bodies in medicine, including the Association of American Medical Colleges, the National Resident Matching Program, the Accreditation Council for Graduate Medical Education, and a consortium of hospitals, to dictate the compensation and training conditions for medical residents.
So: government pays hospitals per training slot while a cartel of private governing bodies regulates compensation and training conditions.
It’s about as anti-capitalist a system as one could imagine, which suits doctors just fine in some circumstances. (In others, for example when their reimbursement rates are threatened by government regulation, those same doctors will interminably rail against the slippery slop of socialized medicine.)
One could argue - and many do - that the system is essential for producing quality, well-trained doctors nationwide while exempting medical schools from the financial burden (which, as previously stated, is not actually a burden) and administrative costs of training those doctors.
As the 2004 legislation which exempted the Match program from antitrust laws states, having to defend said system against antitrust lawsuits would:
…divert the scarce resources of our country’s teaching hospitals and medical schools from their crucial missions of patient care, physician training, and medical research.
The legislation also notes that, prior to the matching system now in place, medical students often felt pressure at an unreasonably early stage in their careers to seek admission and acceptance to residency programs:
As a result, medical students often made binding commitments before they were in a position to make an informed decision about a medical specialty or a residency program and before residency programs could make an informed assessment of students’ qualifications.
That binding commitment is a legitimate concern. But it’s also a concern shared by every other non-medical student, school, and training program. Imagine if every other graduate school in the country could simply give over their admissions process to an algorithm-driven monopoly protected from anti-trust legislation. Imagine if every job-seeker could simply be “matched” to an employer, rather than compete for jobs. Imagine if every employer could simply submit their preferences for workers to an algorithm rather than compete for workers in the open job market.
The Match system may be working to control standards (and pay) for residency training, but extrapolate its structure anywhere else in the economy and it begins to sound a lot like a Brave New World corporate-computer-controlled dystopia (either that or a socialist utopia, depending on who you’re talking to).
The argument from CMS
CMS, for its part, will be arguing in bankruptcy court that its provider agreement with Hahnemann cannot simply be sold in the open market.
More specifically, CMS is arguing that the deal would have to include “substantially all of the assets necessary to actually operate Hahnemann,” as Harold Brubaker of the Philadelphia Inquirer reported. Simply segmenting off the resident slots in a sale is not a transfer of all the assets necessary to operate the hospital, and therefore it’s a violation of the agreement between CMS and Hahnemann.
In contrast, Hahnemann’s lawyers argue that the agreement is property, and thus can very much can be bought, sold, or transferred.
All of which is leading the Medical community to an uncomfortable question: are medical residents to be bought and sold as property?
The industry’s mixed messages
The question isn’t an easy one to answer for an industry tied in knots over its own mixed messages.
Physicians, provider groups, and the private organizations that represent them would alternatively have the public believe on the one hand that the government should keep its hands off healthcare and let the market do its work; but on the other hand that physicians themselves are above the profit motive and only care about what’s best for their patients - that regulation should promote fair competition in the market, but also that regulation should protect medical training programs from fair competition in the market.
Hahnemann, an urban hospital in a fairly wealthy city, won’t be the last to close its doors and seek bankruptcy protection. It won’t be the last to leave hundreds of residents stranded in the middle of their training. And it won’t be the last to raise thorny questions about the interplay of market capitalism and government regulation in American healthcare.