How Financialization Has Impacted the US Healthcare System

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There has been a long-standing debate as to what the profit motives for the US healthcare system are. Is it greed or is it purely for the love of helping patients, with no strings attached?

A recent study published by The New England Journal of Medicine (NEJM) explores the role of financialization—the impact of financial markets when it comes to motives, institutions, and “elites”—especially concerning its effect on cost, equity, and quality.¹

Technically, one could say that the concept of financialization dates back to the 1970s, according to the study. The term builds upon two fundamental notions:

1. Corporatization: the role of large organizations that utilize the market power to maximize profits to the best of their ability
2. Privatization: the role of the private sector when it comes to providing a form of healthcare service

By pulling practices from both of these ideas, the study authors said that any sort of healthcare asset, whether it be public, private, or corporate, can be turned into a salable or tradable asset for capital gain.

Over the past decade alone, investigators found that private equity (PE) firms have closed more than 8,000 transactions involving healthcare entities, whose total value equals close to $1 trillion. It has been common practice for these PE firms to purchase various healthcare operators such as nursing homes, hospitals, physician practices, and others (along with their debt), then quickly sell it for a profit, according to the study. Another route they take is through real estate investment trusts, where they purchase property and then lease it back to the healthcare facilities.

The study authors noted that financialization can also include taking an indirect stake in a healthcare entity via early-stage investments (some might call it “getting in on the ground floor,” and venture capitalists fund healthcare startups if it means early equity) or by investing in the stock market. In regard to the former, the authors of the commentary noted that the amount raised by healthcare venture capital funds grew by nearly a factor of eight over the course of a decade, reaching a value of $28.3 billion by 2021. Hedge funds, pension funds, and mutual funds have also been commonplace within the healthcare system.

There are now a multitude of publicly traded entities in the space, such as pharma companies and health insurers, that, in order to maximize shareholder value, have grown financially through both mergers and acquisitions and by raising their prices.

When it comes to the public sector, the study authors noted that the federal government has reportedly encouraged financialization in various ways, including:

1. Deregulating capital, along with the absence of oversight. Congress removed controls when it came to the flow of credit and introduced foreign capital to the economy.
2. Public financing of health care services for private use. This accounts for 60% of national healthcare expenses.
3. Designing an “expensive, fragmented health care system.” For instance, policies that limit Medicaid expansion have resulted in rising medical debt.

The investigators raise a valid question: with the financial sector’s large impact on the healthcare sector, is the United States getting a good deal out of this arrangement? Being able to answer this question will require plenty of research and public feedback, but philanthropic groups and federal agencies can help tackle this issue by producing evidence of its impact, according to the authors.

A final consensus, the authors wrote, was that “…Financial capital shapes the geography of business and infrastructure development, the success of local economies, the distribution of household credit and debt, and thereby access to most health-related resources—such as housing, food, and education. Though they remain understudied, inequities endemic to and produced by the financial sector—such as unequal access to financial services—may engender health inequities. Taking these steps, among others, is critical if we recognize the financial sector for what it has become: a structural determinant of health.”

Reference

1. Bruch JD, Roy V, Grogan CM. The Financialization of Health in the United States. N Engl J Med. January 11, 2024.