Wednesday, September 3, 2008

Hospitals and the Real Costs of Protection

The August 28, 2008 WSJ (front page, "Nonprofit Hospitals Flex Pricing Power") had a well-researched article on hospitals. Most people don't realize hospitals and even insurance companies are usually nonprofit corporations. What's worse is that many hospitals and insurance companies are nonprofit subsidiaries of larger partnerships or for-profit corporations, making it hard to ascertain the true owners. When lawyers sue hospitals, it usually takes forever to figure out the proper entity to sue. Many times, you have to trace the corporation or non-profit back to a Limited Partnership (L.P.), even though the direct employer is a nonprofit hospital corporation. Corporations, nonprofits, and hospitals have created byzantine empires to shield themselves from liability, which makes it very difficult to point fingers when things go wrong.

For example, you think Stanford University is called "Stanford University"? Nope. That would be too easy. Stanford is broken up into three separate entities: one, the LUCILE SALTER PACKARD CHILDREN’S HOSPITAL AT STANFORD; two, STANFORD HOSPITAL AND CLINICS; and three, The Board of Trustees of The Leland Stanford Junior University. Yes, it's a scary world when you realize how hard it is to point blame in an ever-expanding universe where lawyers spend all day trying to shield their clients from liability.

I'm not saying Stanford is doing anything unwise--they should be trying to ensure that a medical malpractice judgment against a hospital doesn't cost their University students anything, but at some point, Enron and its fake, fraud-masking subsidiaries come to mind (remember, Enron claimed major profits partly because it kept offloading its debt through a complicated set of fake subsidiaries that took on Enron debt for stock). We forget there's a moral cost to this kind of paper legal protection. The more fragmented a place or entity, the harder it is for people to take responsibility or to find out where the buck stops. Corporate fragmentation disincentivizes entities and their agents to act responsibly, because the money and assets can be shifted or protected through more and more complex special purpose paper vehicles.

Pretty soon, it won't be enough to sue, get to trial, win the trial, and then deal with the appeal after multiple years have passed--when you do win and finally get a judgment, maybe the entity you sued doesn't have assets to claim, or you can't pierce the corporate veil. Corporate America, One. Consumer/Employee, Zero.

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