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LECTURE+10+-+Hospital+Econ - Lecture 10 Hospital Economics...

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Lecture 10: Hospital Economics Health Economics 01:220:316 Prof. Derek DeLia, Ph.D.
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Evolution of the modern hospital Pre-20 th C. Charitable institutions Military hospitals for soldiers/veterans 20 th C. forward Centers of medical technology Doctors workshops
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Hospital objectives Hospital objectives Maximize profits Community service (max output) Maximize quality Safety net mission Teaching Research Less profitable objectives ==> cross subsidies
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Cross-subsidies & pricing pressure Pre-1980’s Cost-based FFS Easy cross-subsidies Medicare Prospective Payment System (PPS), 1983 Diagnosis Related Groups (DRG’s) Fixed price within DRG’s Other adjustments Private sector managed care Selective contracting Capitation Utilization review Cost-shifting One payer pays less ==> charge other payer more
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DRG weights in 1988 DRG Title Weight 10 Nervous system neoplasm w/complications & comorbidities 1.2123 11 Nervous system neoplasm w/out complications & comorbidities 0.7729 236 Fractures of hip & pelvis 0.9036 433 Alcohol/drug abuse, left hospital against medical advice 0.4232 474 Tracheostomy 11.8772
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Cost-shifting example Hospital serves 2 markets Private demand: P 1 = 3,000 – 10Q 1 Medicare pays fixed rate R = 800 Total costs: C(Q) = 2,000 + Q 2 Q = Q 1 + Q 2 Same for private & Medicare patients Assume hospital can serve unlimited #patients Questions : 1. How many patients will a profit maximizing hospital serve in each market?
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