Frankenstein’s Monster…Or Why Privatization of Healthcare is a Bad Idea

In the late 1800s, the US government tinkered with a relatively benign creature and created a monster.  Like Dr Frankenstein, the US government acted with the best of intentions.  It wanted to allow corporations to raise capital to finance the expansion of the railroad without exposing the investors to personal liability and bankruptcy if the venture failed.  The result of the government’s intervention was a creature which is legally considered a person.  This person must act in accordance with its by-laws and the law.  Unfortunately this means that it is legally programmed to be self-interested, amoral and without a conscience.*

A corporation has but one purpose—to increase shareholder value (also known as maximizing shareholder wealth).  In monster terms this would be “to grow big and powerful so that your owners get rich”.

The guiding principle of corporate law (let’s call it the prime directive) which governs all corporate activity is simple:  the directors and officers of a corporation must act in the best interests of the corporation.  The best interests of the corporation are synonymous with the best interests of the shareholders.  And shareholders want to make money.  If they didn’t they would donate their cash to charity (or invest it in my stock picks).

So why are two out of the three PC candidates in the race for the premier’s job prepared to privatize some of our healthcare services?  Gary Mar says the wealthy are already accessing private clinics outside of Alberta, so why not capture that “economic opportunity” here.  Doug Horner supports competition by healthcare providers for delivery of publicly-insured services.  Alison Redford is the only PC leadership candidate who clearly understands that increased privatization will erode our universal public healthcare system.

No doubt Mr Mar and Mr Horner mean well;  unfortunately they’ve forgotten the prime directive of corporate law.  All corporate activity is for one purpose—to make money for the shareholder.  Any CEO who fails to deliver on the prime directive has the life expectancy of a gnat.  If Mr Mar and Mr Horner applied the prime directive to the private corporations jostling to offer Albertans privatized healthcare services, they would quickly realize that the offer is a “limited time offer with no warranties”.  The minute healthcare services become too costly and unprofitable, they’re gone and so are the consumers (formerly known as patients) who are depending on them.

But wait.  What about corporate social responsibility?  Every time we turn on the TV we’re faced with self-congratulatory spots telling us all the wonderful things that corporations are doing for the little people, the environment and society as a whole.  Doesn’t this offset the drive to make money at all costs?

Well, look at the history of corporate social responsibility.  It’s not a new phenomenon.  It emerged at the turn of the century with the growth of large corporations like AT&T whose sheer power and size created mistrust in the population.  It reappeared in the 1930’s during the Great Depression, and again and again in the slipstream of corporate greed and mismanagement following the implosion of Enron, the meltdown of global financial markets and in the steady stream of environmental disasters which continue to occur on an alarmingly regular basis.  History demonstrates that the ability of corporate social responsibility to moderate the drive to make money is nonexistent.

When stripped of all the rhetoric, corporate social responsibility is simply a corporation’s effort to tamp down adverse public opinion by voluntarily stepping up as a good corporate citizen and “taking responsibility” for its employees, its customers, its neighbours, the environment and the general public so that the government will not feel compelled to pass regulations to protect these stakeholders from the corporation’s actions.

Corporate social responsibility, like all things corporate, is subject to the prime directive.  It must make the shareholders wealthy.  Smart corporate social responsibility does just that by keeping the public and the regulators at bay, thereby avoiding litigation, remediation and other “non-value adding” activities.

The Chartwell case is a classic example of the prime directive and corporate social responsibility in a microcosm.  Thirty seniors were slated for eviction from their assisted living units because Chartwell, a for-profit corporation, decided not to renew its contract with the Alberta government.  The contract required Chartwell to provide accommodations, food and housekeeping for seniors for a price.  A Chartwell senior vice president said renewing the contract “wasn’t in our best interest”.  (Sound familiar?)

News of the evictions caused a public uproar.  Chartwell relented and extended its contract for another 3 years.  Was this because Chartwell suddenly developed a social conscience?  Not likely.  The son of a 92 year old war veteran on the eviction list put it best:  ”Chartwell decided they’d had enough of being seen as the bad guys”.** Bingo.  It was time to roll out some smart corporate social responsibility.  Chartwell is in the business of providing independent and assisted living seniors housing.  It’s not good business to act like a heartless landlord tossing disabled war veterans into the street in order to make an additional $600/month.

The underlying problem is this:  public institutions are created to serve the public good;  corporations are created to maximize shareholder wealth.  Attempting to provide public services via a private corporate model is like trying to squeeze a square peg into a round hole.  There’s bound to be a rub somewhere.

To illustrate the conundrum consider a comment from Milton Friedman, a Nobel prize winning economist.  Mr Friedman argues that all social services should be handed over to the private sector—except the military.  He didn’t say why but I will.  The privatization of the military creates a mercenary army.  Mercenaries are another one of Frankenstein’s monsters and under the prime directive will go into battle for the highest bidder, including a bidder prepared to wage war on the home country.  Such a scenario is unthinkable.  Ask yourself this…if Mr Friedman does not trust the private sector to protect the nation, why should we trust the private sector to protect the nation’s most vulnerable people, the young, the old, the sick and the dying?

So before Mr Mar and Mr Horner press ahead with their privatization solutions to escalating healthcare costs, they would be well advised to go back to the most important principle of all:  the government takes care of its people, but corporations take care of themselves.

*This post has drawn from the concepts and ideas presented in The Corporation by Joel Bakan.     

** Calgary Herald On-line July 15, 2011

This is the first in a series of posts on privatization, deregulation and what we can do about it.  Next up:  “Unleash the Kraken”. 

This entry was posted in Alberta Health Care, Politics, Politics and Government and tagged , , , . Bookmark the permalink.

6 Responses to Frankenstein’s Monster…Or Why Privatization of Healthcare is a Bad Idea

  1. Ted Woynillowicz says:

    It would be interesting to find out how much taxpayer money was spent on the settlement between AHS aka the GOA and Chartwell. In my view a public and transparent audit of Alberta Health is essential to evaluate if the Alberta Government is spending taxpayer money responsibly or merely spending money in a effort at damage control.

  2. Ted you raise a very important point relating to the need for transparency with respect to these P3 partnerships. One wonders what Chartwell is paying to lease this prime property from the government for 60 years. Is it competitive with the market? Also why were there so few assisted living units in the facility and why were they leased for such a short term–3 years isn’t much of a commitment on Chartwell’s part. Lastly was the government “surprised” when the tenants were evicted in July, they knew that the lease expired in January. All these questions call for greater accountability, but that’s not possible without greater transparency.

    It’s a little frightening to think that the leading contender for the premier’s seat, Mr Mar, is a strong proponent of P3 arrangements. As Dr Tom Noseworthy said…it’s a business. You get what you want now, you pay for it later. Thanks for your comments.

  3. roy wright says:

    Your definition of a corporation as one whose guiding principle is to make money helps me start to form an opinion of what motivates this “person” and perhaps how I may want to interact with them. You also state that public institutions were created to serve the public good and correctly observe that fitting these two “personalities” together is not easy.

    I see an increasing tendency of government to use the “P3” style of partnerships to deliver services such as education, health and even road building as compared to the old way of doing it themselves. Chartwell is a prime example where it behaved exactly as you predicted and the government acted surprised. Government intervention should be for the long term as public interest does not stop because a contract expires (or profits decline). The public interest does not stop when a facility has been run into the ground by extracting short term gains and not investing for the long term. Can you imagine a private company taking over the City water system? It would sign a contract, perhaps 5-10 years long, inherit or borrow all the infrastructure, and run it to the end of the contract. It needs to maximize profit during that period and likely would defer maintenance in order to obtain increased short term returns. Why should it worry about maintaining the infrastructure as all it has to do is deliver water for 10 years while maximizing profit…it can walk away at that point and the City likely will get the “keys” to a worn out system with deferred maintenance that now needs to be fixed at public cost. How is the public good being served in this instance? The government may have achieved some short term objectives such as reducing staff, or stating it has reduced the size of operations, but is that smart?

    Government and corporations both have a clear mandate and attempts by government to either pretend it is “business” oriented or to outright “dance with the devil” is pure folly on the part of government. It should stick to the business of providing essential public services that either lose money (and the private sector can’t supply as a result) or that cannot placed at risk. Corporations can then get back to making money on other discretionary tasks such as building houses and extracting resources. The only role government should play in that second part is one of regulation as Adam Smith correctly points out in “The Wealth of Nations”, government needs to be there to “curb the excesses of capitalism”. Smith clearly understood what the respective roles were to be; perhaps his book should be required reading, especially for our “conservative” minded politicians and bureaucrats!

  4. Your point that corporations will cut services in order to maintain an acceptable profit margin is a good one. It’s bad enough when the services being cut are garbage pick up or street cleaning. It’s down right immoral with the service being cut is healthcare or education. The American company Edison Schools embarked on a drastic cost reduction program to shore up its sagging stock price. In addition to selling off textbooks, computers, lab equipment and musical instruments, the CEO suggested that the Philadelphia area schools could save money by firing 75 administrative staff and replacing them with 600 Edison students who’d work an hour a day for free! Doesn’t make any sense until you go back to first principles…a corporation’s objective is to make money, the government’s objective is to serve the public. That’s a critical distinction.

  5. Carlos Beca says:

    All of what was said in the previous comments is absolutely correct and we all have known these for years. The problem is that people like Mar and others worse than him, are imbedded in a neo-conservative ideology and even when they think things are not right, they will not admit it and keep moving forward to self destruction. It is called being IDIOTS. In Alberta, this kind of atittude has been happening since Peter Louhgheed left government. He was the last real Conservative. Since then we have been blessed with a string of people that could not do a security job in a building never mind running the province. Klein, who is now a star of the of Neo-Conservative movement should be in the guiness book records with the distinction of ‘How to not be able to run a government even when the coffers are full’. He paid the deficit yes, but only because he got blessed with one of the biggest booms in Alberta history. All of the cuts and outsourcing and P3s and all that jazz, if properly investigated, will show for sure that there were no gains there at all. The negative consequences almost for sure overrode the few positive that might have existed.
    Anyway we can talk about this forever but it is clear that with proper quality control and proper management, public services can be made cheaper and as good as any private services. The problem is that we are raised and brained washed to believe that only greed satisfies human interest, everything else is crap. This belief is now repeated ad nauseum.

  6. Carlos, in just a few sentences you’ve clearly outlined the litany of failures that have plagued Alberta since the PC’s lost their way. It’s really frustrating (and downright scary) to see that Mar is prepared to continue the downward spiral with his strong support of privatization of critical public services. His attempt to “fix” wait times by opening the door to even more privatization will make matters worse. I also agree with your comment that a proper audit of the P3’s and misguided cost reduction programs would likely reveal no real gains, because any apparent “gains” would quickly be buried in the true costs of the project over the long term.

    Some politicians and political parties are trying to make a real change. We need to find them and show our support at election time.

    Thank you for your comments.

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