Responsibly Managing the Medical School–Teaching Hospital Power Relationship : Academic Medicine

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Responsibly Managing the Medical School–Teaching Hospital Power Relationship

Chervenak, Frank A. MD; McCullough, Laurence B. PhD

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Academic Medicine 80(7):p 690-693, July 2005.
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The mission and social role of academic health centers are becoming increasingly complex.1–3 At the heart of this complexity is the relationship between U.S. medical schools and their associated teaching hospitals, which ranges from outright ownership to subsidiary to independent affiliate. Finances have been a central part of this relationship for over two centuries. For example, the royal infirmary in Edinburgh, Scotland in the late 18th century derived a significant portion of its revenues from fees paid by medical students to gain admission to the wards for teaching purposes.4 Now funds usually flow in the opposite direction; many teaching hospitals transfer funds to the medical schools to pay faculty for providing care to medically indigent patients, teaching of residents, and providing services that are of value to the hospital. Teaching hospitals and medical schools operate in the contexts of the overall structure, and sometimes lack of structure, of the U.S. health care system and complex and variable legal and organizational relationships.

Finances are an increasingly contentious aspect of the relationship between medical schools and their teaching hospitals.5 Joint budget negotiations can be shaped by incomplete information and sometimes even misinformation, failure to consider enhancements to other services, strategic procrastination and strategic ambiguity in the process and substance of the negotiations,6 unfunded mandates for matters vital to the hospital, such as quality, and attempts by each party to shift costs toward and reimbursements away from the other party. Both parties are under mounting and relentless fiscal pressure, creating an environment in which each party increasingly tends to focus on protecting its organizational self-interest, especially the bottom line.1–3 As a result, both parties are at risk of acting solely on self-interest, thus losing sight of and failing to be guided by their co-fiduciary responsibility for excellence in patient care, education, and research.6 This could result in ethically unacceptable organizational cultures and practices that could aversely affect the parties’ ability to fulfill that responsibility.

In this article we provide an ethical framework to guide the responsible management of the medical school–teaching hospital power relationship. First, we analyze the relationship between medical schools and teaching hospitals in terms of two relevant economic concepts, monopoly power and monopsony power. Second, we argue that the responsible management of this relationship should be based on both fair market conditions, a key concept of business ethics, and co-fiduciary responsibility, a key concept of medical and health care ethics. Both concepts are required for any adequate ethical framework for the medical school–teaching hospital relationship. Third, we identify the implications of these two concepts for how the medical school–teaching hospital power relationship should be responsibly managed by both parties, emphasizing the centrality of transparency to their proper relationship as an antidote to the potentially distorting influence of self-interest.

Two Kinds of Power in the Medical School–Teaching Hospital Relationship

Monopoly power is a familiar economic concept. It means that there is a single or small group of sellers that dominates a market. The result is an abuse of normal market functions, because of a large disparity in power between seller and buyers. Disparity of power is not intrinsically unethical. Disparity of power that results in exploitation is ethically problematic. Exploitation of power occurs when the powerful party gains disproportionate benefits with little or no burden, and the weaker party bears disproportional burdens with little or no offsetting benefit. Monopoly power means that the seller gains the economic benefit of secure revenue streams and increased profit, while shifting to buyers the burden of resulting higher costs. Monopolies exploit buyers when monopolies abuse their power by setting artificially high prices, withholding goods or services, and not providing buyers adequate information, all of which unavoidably injure the interests of buyers. The long-standing public policy response to the monopolistic exploitation of power has been government regulation to reduce monopoly power and prevent exploitation, so that markets function fairly and efficiently. In the field of medicine, for the past century or so, allopathic and osteopathic physicians have had monopoly control over the provision of medical services paid for by private and public third-party payers because only these physicians can be licensed to practice medicine.7 There has been resultant, substantive regulation of physicians by governmental agencies and insurance companies.

Monopsony power is a less familiar economic concept. Monopsony means that a single buyer or group of buyers dominates the market, resulting in a disparity of power that is the converse of monopoly power, but, like monopoly power, ripe with the potential of exploitation when that power is abused. Monopsonies exploit sellers when monopsonies abuse their power by setting artificially low prices, not ordering goods or services, and not providing adequate information, all of which unavoidably injure the interests of sellers. Managed care organizations (MCOs) during the 1990s exhibited many aspects of monopsony power in their dealings with hospitals and physicians, and MCOs have been increasingly subject to government regulation.8–11 The federal government’s Medicare program, a very large purchaser of health care services, can also exert potentially exploitative monopsony power.

Both monopoly power and monopsony power become ethically problematic from the perspective of business ethics when they take the abusive form of distorting the market conditions of transparency. Transparency means that both buyers and sellers have information about each other and about market conditions that is generally requisite for free market exchanges and the efficient function of markets. Transparency thus understood allows each party to protect itself adequately from exploitation, making transparency a fundamental ethical requirement for fair-market function when monopoly or monopsony power is present, and even more so when both are present, which is the case in the medical school–teaching hospital relationship. Transparency is ethically obligatory from the perspective of medical ethics, thus adding, as we shall see, a powerful additional ethical justification for it.

Responsibly Managing the Medical School–Teaching Hospital Power Relationship

The medical school–teaching hospital power relationship is often one in which the teaching hospital is the sole or dominant purchaser in carrying out such hospital responsibilities as residency education and supervision, care of indigent patients, and other hospital services that are of value to the hospital, either as a profit center or a necessary services operated at a loss. To the extent that this is the case, the teaching hospital has monopsony power over the medical school. This is especially the case when a large department, such as medicine, has a large number of highly regarded voluntary faculty who compete with full-time medical school faculty and for whom the hospital may make preferential arrangements. Because the medical school needs the teaching hospital to support faculty, provide clinical training of students, and conduct research, submitting to the teaching hospital’s monopsony power is unavoidable.

A particular service of a medical school may give the school a specific monopoly power in virtue of strong financial and expertise barriers to entry, such as a highly regarded assisted-reproduction medicine service. The medical school itself may or may not be a monopoly seller of services to the teaching hospital, depending on how its faculty practice plans or physician organizations are organized and whether the medical school controls granting of hospital privileges. In those settings in which the medical school controls hospital privileges, it is the sole provider of these services; otherwise, the medical school is the dominant provider. In both cases, the medical school has monopoly power in varying degrees over the hospital. In closed-staff hospitals, for example, the monopoly power of the medical school is considerable, in contrast to the weaker power of a medical school affiliated with an open-staff hospital.

This complex buyer–seller market relationship threatens transparency. This is a situation therefore ripe with the potential for exploitation of power by both parties, a potential that increases as concern about the bottom line increases. Unlike the situation in the general economy—such as with the old telecommunication regional monopolies, or the managed care monopsony of the 1990s—government regulation of the medical school–teaching hospital relationship has not been used to date to deal with this potential for exploitation. U.S. society, instead, has relied so far on self-regulation. The two parties, therefore, need to assume responsibility for the ethically guided self-regulation of their complex power relationship. Assuming such responsibility may obviate the need for government regulation of their power relationship in the future.

In making the case for responsibly managing the medical school–teaching hospital relationship, we first appeal to the concept of fair market conditions from business ethics, and the transparency required for meeting and sustaining fair market conditions. By distorting or undermining transparency, monopoly and monopsony power create unfair market conditions in the relationship between medical schools and their teaching hospitals.

Transparency means that both parties must be forthcoming about revenues, including collateral revenues, and actual and assigned costs. Gathering such information, for example through a comprehensive informatics system, will be costly, and such cost should be allocated fairly. Sharing this information routinely will allow a factually based, informed allocation of revenues and costs as they relate to the mission of excellence in clinical care, education, and research.

The justification of transparency in business ethics ultimately involves an appeal to rational self-interest in avoiding (mutual) exploitation in market exchanges. This is a slender reed on which to hang hopes of improving the relationship between medical schools and teaching hospitals. We take this view because markets, by their very nature, are at least indifferent to the extinction of the inefficient buyers and sellers, and even encourage their extinction. In the efficiency-focused ethics of market exchanges, there is nothing wrong with indifference toward or encouragement of such extinction.

From an ethically informed perspective on patient care, medical education, and research, however, values other than efficiency justifiably become of at least equal, if not greater, importance. There is a well-understood range of departments and services that are essential to the missions of patient care, medical education, and research, some of which may be economically efficient (e.g., various surgical subspecialties), and some of which may be economically inefficient (e.g., pediatrics and preventive medicine). When one considers the core mission of medical schools and teaching hospitals, the ethics of market exchanges is inadequate to serve as the sole basis for responsibly managing the medical school–teaching hospital relationship. An explicit appeal to the medical ethical concept of co-fiduciary responsibility provides a crucial, additional basis for such responsible management, because fulfilling co-fiduciary responsibility makes transparency obligatory, not just a matter of rational self-interest.

The concept of physicians and hospitals as fiduciaries of patients comes to us from 18th-century British medical ethics. The Scottish physician–ethicist John Gregory (1724–1773) and the English physician–ethicist Thomas Percival (1740–1804) identified three components of this ethical concept.12 The first is that physicians, and through them hospitals, should be scientifically and clinically competent, by basing clinical practice and its continuous improvement on what we now call evidence-based medicine. Second, physicians and hospitals should act primarily for the benefit of patients, keeping their self-interests, including economic interests, systematically secondary. Third, medicine, and by implication, hospitals, are public trusts that should be managed for the long-term benefit of patients and society, not primarily for the self-interests of physicians and hospitals, including legitimate and even urgent economic interests.

It is clear that in the clinical setting, the fiduciary relationship between the physician and the patient creates ethical standards that are designed to protect the patient from exploitation. Parity of power cannot be achieved between physicians and patients, but patients can be, and are, empowered by the ethical standards of clinical transparency in the informed consent process. Brody13 and Wear14 have explained that clinical transparency obligates the physician to provide clinically reliant information to the patient. This includes information about what is known, unknown, and uncertain about the patient’s condition, medically reasonable alternatives for managing it, and the benefits and risks of these alternatives. Transparency thus allows the patient to understand his or her physician’s clinical judgment, which gives moral authority to that clinical judgment and the physician’s greater power when the patient consents to clinical management. This granting of moral authority does not eliminate the disparity of power between the patient and the physician, but does legitimize it. Both the physician’s primary commitment to protecting the patient’s health-related interests and the transparency of the informed consent process protect the patient from the potential for exploitation that results from this ineliminable disparity of power.

The growing monopsony power of teaching hospitals as a major source of revenue for medical schools, like the monopsony power of managed care or Medicare, is in most instances greater than the monopoly power of the medical school. This is especially the case when the medical school does not own the hospital or control hospital privileges. As in the physician–patient relationship, transparency functions to legitimate the greater power of the teaching hospital, because transparency requires the hospital to give an adequate accounting of itself, especially its reasons for its decisions about allocation of revenues and costs. Teaching hospitals are ethically obligated to seek such justification for their growing power because they are co-fiduciaries of patients with the medical school. In the present context, this means that the hospital and the medical school have mutual obligations to be fiduciaries of each other’s missions and legitimate interests, including the bottom line as a means to fulfilling co-fiduciary responsibility. Patients, medical education, and research are put in peril by an organizational culture that becomes less and less shaped by a mutual commitment to co-fiduciary responsibility. Medical schools should therefore strengthen their commitment to patient care, to avoid treating the teaching hospital mainly, or even simply, as a venue for promoting knowledge and discovery. Teaching hospitals, therefore, should strengthen their commitment to medical research and education as synergistic, rather than competitive, with their mission of patient care.

Implications for Leadership of Medical Schools and Teaching Hospitals

Transparency means that the leaders of both the medical school and the teaching hospital should routinely provide each other information about economic self-interests that are necessary for fulfilling co-fiduciary responsibility. For example, improving the quality of patient care is a fundamental aspect of co-fiduciary responsibility that also costs money. There need to be honest business plans that clearly define the true costs of continuous quality enhancement and revenues available to cover them, and a realistic plan to cover the shortfalls. To avoid exploitation because of the monopsony power of the teaching hospital, the assumption of costs by each party should reflect the portion of the benefit claimed by each party in question. The calculation of revenues and flow of funds between the two institutions should be comprehensive, including collateral revenues to both parties and budgets that show in sufficient detail where and how money is being spent. The calculation of costs should be rigorous, comprehensive, and honest. Otherwise, the teaching hospital can exploit the medical school by shifting costs to it, thus imperiling its mission of patient care, education, and research. The medical school can exploit the teaching hospital by demanding excessive reimbursements to cover the costs of its own, sometimes inefficient, bureaucracies (e.g., of a physician organization) that the medical school is unwilling to change.

Failure to achieve transparency results in both parties’ gaming the system by various means such as strategic procrastination and strategic ambiguity,6 misdirection, and outright deception.15 All of these corrupt an organizational culture9 that should be based on co-fiduciary responsibility, not just the ethics of market exchanges, especially economic efficiency. In such an environment, when each party confronts an assumption of cost for a vital aspect of mission, it hopes that the other will blink first and eat the cost instead of negotiating under conditions of transparency and fairness. Such an organizational culture provides perverse incentives to both parties to undermine the ethical common ground that should define the purpose of their relationship: co-fiduciary responsibility for patient care, education, and research.

It is important to distinguish the reality of transparency from its appearance. From a desire or need to protect monopoly or monopsony power, one or both parties could simulate transparency by publicly committing themselves to it, but then not funding the requisite infrastructure, such as committing to quality enhancement without paying for data collection, analysis, and dissemination or requiring management accountability. This calls to mind Machiavelli’s notorious claim that the appearance of virtue is more important that virtue itself, especially when acting on virtue will diminish power.16 Fostering the appearance of transparency may well advance monopoly or monopsony power. However, in our view, it ultimately provides the incentive to put self-interest first, which is corrosive of an organizational culture of co-fiduciary responsibility.

The reality of transparency, as distinguished from its appearance, requires disclosure of complete and accurate information about revenues and costs because these are the sources of monopoly and monopsony power. Less- than complete and accurate disclosure of costs and revenues is the principal tool of abusive power and therefore exploitation. Transparency is not, however, required for domains of information not related to the self-regulation of monopoly and monopsony power by co-fiduciary responsibility (e.g., disclosure of salaries of individual physicians or administrators when this information is not necessary in identifying the costs of fulfilling co-fiduciary responsibility).

A Challenge for Leaders of Academic Health Centers

In this article, we have shown that an understanding of the nature of both monopoly and monopsony power is essential to appreciate the need for an ethic of the complex power relationship between medical schools and their teaching hospitals. We have argued that this ethic should be based on implementing a co-fiduciary responsibility for excellence in patient care, medical education, and research. Leaders of academic health centers should prevent abuse of monopoly and monopsony power and the resulting exploitation in this relationship as an essential preventive-ethics component of an organizational culture of co-fiduciary responsibility. Long ago, Gregory and Percival were self-conscious and effective reformers of medical practice and hospital administration. Academic leaders should continue that tradition by becoming models for the reform and improvement of the power relationship between medical schools and their teaching hospitals. In addition, the medical school–teaching hospital power relationship has important ethical implications for departmental chairmen in their leadership roles and for faculty in their teaching, research, and patient care roles that need to be further explored.


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© 2005 Association of American Medical Colleges