Planned Parenthood’s Big Bad Business Model

Planned Parenthood’s Big Bad Business Model

Planned Parenthood’s business model requires it to push abortion on its poorest customers. Republicans in Congress owe it to women to direct Title X family planning funding elsewhere.
Willis L. Krumholz
By

Mollie Hemingway recently reported on the horrifying reviews Planned Parenthood clinics have received on Yelp. The reviews detailed long wait times, dirty exam rooms, and rude or unhelpful Planned Parenthood staffers.

One reviewer said the clinic she visited was “all sorts of nasty.” Another said Planned Parenthood had given her the wrong prescription. Another reviewer went in for an IUD, received five price quotes ranging from $200 to $785, and wasn’t told her appointment was only an “initial consultation” until she was hit with a hidden fee of $85.

It gets worse. The Federalist recently published a young woman’s account of her experiences with Planned Parenthood. During one particular visit, Planned Parenthood employees bullied the young woman for not indicating she would consider abortion while she was waiting for the results of a pregnancy test, to the point where she left in tears.

There’s a reason Planned Parenthood isn’t very good at women’s health care, as these reviews attest: Planned Parenthood’s bad business model. Because Planned Parenthood is a rational economic actor, its clinics will push abortion over other women’s health care—explicitly in the event of a pregnancy, and implicitly by not providing adequate contraceptive care and instruction.

Affiliates get the highest profits from abortion, so they have an incentive to oversell this service.

Why? First, Planned Parenthood is a business franchise, just like McDonalds, and its franchisees—local clinics, usually referred to as “affiliates”—are cost-sensitive. Affiliates get the highest profits from abortion, so they have an incentive to oversell this service.

Second, because many Planned Parenthood customers have nowhere else to turn, Planned Parenthood can get away with providing shoddy contraceptive care. Here, there are two incentives at play: Planned Parenthood faces a low profit margin when selling contraceptives; and providing subpar contraceptive care and instruction indirectly pushes abortion on some customers.

All this speaks to the need for lawmakers to redirect the almost $100 million in yearly Title X funding that Planned Parenthood receives to clinics that don’t have the same conflict of interest.

Look at the Affiliates

Planned Parenthood, the media, and the Democratic Party claim that Planned Parenthood isn’t all about abortion—abortion is just a necessary sideshow to Planned Parenthood’s many good deeds. If Republicans cut off Planned Parenthood’s Title X funding, poor women will suffer. This is a lie. Planned Parenthood affiliates are addicted to abortion.

Planned Parenthood affiliates are addicted to abortion.

First, Planned Parenthood’s structure requires local franchisee affiliates to be financially independent and self-sustaining apart from the national organization, despite the national organization being flush with cash. This causes local affiliates to be highly cost sensitive, even to the point where several have been caught fraudulently billing Medicaid and overcharging poor women for birth control.

Next, when Planned Parenthood reports its revenues in picture form (see chart below), it throws revenues to both the national organization and its affiliates into one big bucket. So this chart compares apples with oranges.

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Because of Planned Parenthood’s franchise model, if we want to determine the incentives for the actual clinics, we need to examine affiliate-specific revenues (see below).

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If revenue per abortion is estimated to be around $500 (a conservative estimate), then $164 million, or 15 percent of clinic-level revenue, comes from abortion. This not only factors in “Non-Government Health Services Revenue,” but also includes “Government Reimbursements” that go toward abortion (more than half of the states cover abortion through their Medicaid programs). Pro-choice advocates love to point out that abortion is only 15 percent of Planned Parenthood affiliate revenues.

The analysis does not end there. First of all, including “Private Contributions” in total clinic revenues to determine the incentives clinics face is arguable. Many donations come with strings attached, and cannot be counted on year-to-year. That reduces a donation’s impact on a clinic’s day-to-day operational incentives. Cut out “Private Contributions,” and revenue from abortion rises to around 20 percent of Planned Parenthood’s income.

The revenue category that brings the highest margins consists of the fees Planned Parenthood charges its customers.

More importantly, the revenue provided by “Government Reimbursements” unrelated to abortion, which makes up almost half of total clinic revenue, carries incredibly low margins. This is because Title X is a grant-based program that only covers the costs of providing birth control to low-income women, and also because Medicaid compensates providers at under-market rates.

The revenue category that brings the highest margins consists of the fees Planned Parenthood charges its customers, or “Non-Government Health Services Revenue.” Customers usually pay these fees out of pocket. About half of all “Non-Government Health Services Revenue” comes from abortion.

Abortion Makes the Most Money for Planned Parenthood

Comparing the $164 million generated from abortion to revenues from the other services Planned Parenthood provides, it becomes clear that revenue from abortion provides the highest profit margins, and is the biggest contributor to affiliates’ total profit (what Planned Parenthood refers to as “revenues after expenses”). There are five reasons why.

  1. Abortion is a cash business, usually paid for out-of-pocket to the tune of at least $500. Out-of-pocket payments generally carry high margins for health providers.
  2. Consumers of abortion are less cost-sensitive than are consumers of the other services Planned Parenthood provides. The decision to have an abortion is often an act of desperation, and others aside from the direct consumer, such as the father, may be willing to contribute to the cost of the procedure.
  3. Planned Parenthood has a quasi-monopoly in the abortion market, and practices economies of scale:
    1. Before state-regulation of abortion was widely allowed—before Planned Parenthood v. CaseyPlanned Parenthood’s abortion market-share was under 10 percent. After the Casey decision, which increased competitors’ barriers to entry, Planned Parenthood’s abortion market-share climbed dramatically, as did the dollars flowing to its bottom line. Planned Parenthood’s hold over the abortion market now sits at 40 percent of all reported abortions in the United States.
    2. The regulatory burden Casey brought also granted greater rewards for economies of scale, and Planned Parenthood seized on the opportunity: A single mega-clinic, capable of performing one abortion every five minutes, does most abortions for an affiliate.
  4. Abortion services are most comparable to the services of ambulatory (outpatient) surgery centers. The margins available to these centers in a competitive environment run anywhere from 25 to 35 percent. Because patients are discharged quickly, any outpatient procedure or surgery performed is “incredibly profitable.” Further, surgical procedure margins are usually the greatest indicator of overall margins for a healthcare organization.
  5. Even ignoring its lack of competition, Planned Parenthood’s “operating” abortion margin (which includes abortion’s share of an affiliate’s overall costs) is likely much higher than that of the average outpatient surgery center or other competing abortion providers, because Planned Parenthood has so many low-margin services funded by government, which helps eat up overhead and operational costs.

Because of these factors, it is far-fetched to suggest that Planned Parenthood affiliates don’t generate a sizeable portion of their profits—totaling $91 million as of the last reported fiscal year ending in 2014—from providing abortion.

Abortion Is Big Business for Planned Parenthood Clinics

If abortion carries an operating profit margin of 40 percent (meaning a $500 abortion costs Planned Parenthood $300, including overhead and operating expenses, leaving $200 in “revenues after expenses”), abortion contributes to 72 percent, or $66 million, of affiliates’ $91 million in profit.

Between $33 million and $66 million of Planned Parenthood affiliates’ $164 million in abortion sales directly contributes to affiliates’ $91 million in profit.

If abortion carries a profit margin of 30 percent, abortion contributes to 54 percent of clinic profit. If the profit margin for abortion is 20 percent, the procedure contributes to 36 percent of clinic profits. Even if the abortion margin is only 10 percent, it contributes to almost 20 percent of clinics’ bottom line.

Given the capacity of Planned Parenthood’s non-abortion low margin, high volume services to eat up much of the costs associated with clinic overhead, the barriers to entry in the abortion industry, profit margins for outpatient procedures, and Planned Parenthood’s use of economies of scale when providing abortions, I estimate affiliates’ abortion margin (including indirect costs of overhead and operating expenses) to be between 20 and 40 percent. (The exact margin will of course vary from affiliate to affiliate.)

This means that between $33 million and $66 million of Planned Parenthood affiliates’ $164 million in abortion sales directly contributes to affiliates’ $91 million in profit.

In other words, Planned Parenthood is like Hewlett Packard. HP sells a lot of printers, and we all think of “printers” when we think of HP, but HP makes almost nothing on its printer sales, and even sells printers at a loss. Although we don’t associate HP with “printer ink,” HP’s printer division makes most of its money selling ink. HP only sells you a printer so you will later buy the ink.

Planned Parenthood makes little, or even loses money, from the services it bills to government, including when it sells birth control. Planned Parenthood clinics within an affiliate that don’t provide abortion are probably lucky to break even. But Planned Parenthood clinics that don’t provide abortion are brand ambassadors and referral centers to the affiliate’s mega-clinic that does provide abortion, which generates most of the affiliate’s profits.

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Why Planned Parenthood’s Birth Control Services Can Be Awful

Because Planned Parenthood makes minimal profits selling birth control to customers who depend on Title X or Medicaid, the organization doesn’t have a big incentive to provide the best contraceptive care possible to these customers. Of course, if women don’t receive proper contraceptive care, they come back to Planned Parenthood for its high-margin product: abortion. This leads Planned Parenthood to treat patients callously and carelessly—prescribing the wrong type of birth control for some women and wrongfully charging Medicaid-eligible women, which makes poor women less able to afford birth control.

Planned Parenthood customers don’t have a lot of choice.

In a more competitive market, if consumers preferred other options to abortion—such as effective birth control—the effects of these incentives would be muted. Planned Parenthood customers don’t have a lot of choice, however.

Why not? First of all, because Planned Parenthood’s customers are largely poor. Seventy-nine percent of Planned Parenthood patients have incomes at or below 150 percent of the federal poverty level. According to Planned Parenthood, the “vast majority” of the organization’s female patients lack private health insurance, meaning they are uninsured or rely on Medicaid. For such women, Planned Parenthood is usually the only place they can receive care oriented towards family planning or female health, unless a community-funded clinic is available.

Furthermore, because Title X funnels so much federal money into Planned Parenthood rather than community health clinics, the community-funded clinic is understaffed, or Planned Parenthood is the only option altogether. Here’s a screenshot of the list of the top Title X recipients in my area:

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The result of Planned Parenthood’s government-created monopoly is terrible outcomes, in the form of high unintended pregnancy and abortion rates for its customers. This happens for much of the same reason that inner-city public schools have bad results: Planned Parenthood doesn’t have to compete. Federal funding tilts the field in its favor.

Send All Title X Funds to Community Health Clinics

It’s no secret that Planned Parenthood enjoys a government-funded competitive advantage over clinics that could provide women with better-quality reproductive care. In fact, Planned Parenthood officials constantly brag about how many of their customers have nowhere else to turn.

Planned Parenthood officials constantly brag about how many of their customers have nowhere else to turn.

If anything, this speaks to the need for lawmakers to send Title X family planning funding to organizations that don’t have an incentive to push abortion. When Democrats say community-funded clinics don’t have the capacity to see an influx of patients who used to go to Planned Parenthood, they forget that community-funded clinics would have this capacity if they received more money.

The solution then lies in Congress redirecting the nearly $100 million in yearly Title X funds that Planned Parenthood now receives to community-funded clinics that don’t sell abortion. Democrats will cry foul, and label this another example of the “war on women.” False. Planned Parenthood’s business model harms the very women it claims to serve.

All this was seen on a wider scale in 1990s Romania, where the lack of choice coupled with medical providers receiving high payouts for abortion resulted in miserable outcomes for women: high unintended pregnancy rates, which led to high rates of abortion (Romania had 2.2 abortions for every live birth). In America, poor and minority women uniquely experience what happened in Romania. When Planned Parenthood pushed abortion, the young woman we heard about earlier was privileged enough to go somewhere else. Many poor American women have no other choice.

Planned Parenthood’s business model harms the very women it claims to serve.

Who knows? Maybe with different House leadership, the Republican-controlled Congress will see through the flim-flam and put Title X dollars where they will be the most useful to women.

In the meantime, we can back up stories of Planned Parenthood’s malpractice with concrete evidence that may spur Congress to act. Survey the outcomes of women using community-funded clinics versus Planned Parenthood: (1) Measure the rate (percent) of abortions had by pregnant women entering a community funded clinic compared to a Planned Parenthood; (2) Measure the rate of unplanned pregnancies experienced by women who receive contraceptive care at a community funded clinic compared to Planned Parenthood.

My prediction: the data will show that a government-funded monopoly is not in the interests of American women. American women deserve better than Planned Parenthood.

Willis L. Krumholz is a fellow at Defense Priorities. He holds a JD and MBA degree from the University of St. Thomas, and works in the financial services industry. The views expressed are those of the author only.

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