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Even During a Financial Crisis, Physicians have Patients’ Best Interests at Heart

Friday, April 22, 2022


Research from a Purdue University finance expert answers a somewhat dark question: do financial shortfalls at hospitals lead to physicians favoring more expensive procedures to compensate for a weak bottom line?

Specifically, do non-profit hospitals -- their endowments badly hit during the Great Recession – start ordering more intensive procedures?

The answer is no, according to W. Ben McCartney, an assistant professor of finance at Purdue University’s Krannert School of Management. McCartney and coauthors used archival data from 2005 to 2011 to show that on average, the financial crisis did not lead to more intensive (and expensive) procedures.

“Even during the Great Recession of 2008 that was negatively affecting households and hospitals in all sorts of ways, physicians largely have their patients’ best interests at heart and don’t try to push them towards more expensive procedures,” McCartney says.

In their paper “Hospital Financial Health and Clinical Choices: Evidence from the Financial Crisis,” set to be published in Management Science, McCartney, Manuel Adelino of Duke University, and Katharina Lewellen of Dartmouth College find that overall, patients seem mostly immune to the financial woes of their hospitals, especially when the physicians are less tightly linked to the hospital.  

Some physicians are employees of a health care provider, while others are contracted, having office space at a hospital. They do their billing elsewhere and are not officially employees of the hospital.

“The farther way the physicians are from the management of the hospital, the less it seems they care about the hospital’s financial health and the less patients are affected by the financial health of the hospital,” McCartney says.

Financial constraints can cause firms to reduce product quality when that quality is difficult to observe. The researchers test this hypothesis in the context of medical choices at hospitals. Looking at heart attacks and child deliveries, they asked whether hospitals would shift towards more profitable treatments after a financial shock.

The 2008 financial crisis was followed by an unprecedented drop in hospital investments, yet the aggregate trends show no discrete shifts in treatment intensity post-2008.

However, for cardiac treatment, evidence shows that hospitals with larger financial losses during the financial crisis subsequently increased their use of intensive treatments relative to hospitals with smaller losses, consistent with the effects of financing constraints.

McCartney, Adelino, and Lewellen found no so such effect on child deliveries.

This project provides some pretty powerful evidence that separating the hospital’s back office from the physicians making treatment decisions has some important benefits for patients,” McCartney says. “We want physicians to be concerned 100% about patient care, not about their hospital’s financial situation.”