Classen_HealthEcon_Class27 - Hospital Organization and...

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Unformatted text preview: Hospital Organization and Hospital Organization and Competition Class 27 Health Economics Loyola University Chicago April 4, 2011 Lecture Outline Lecture Outline Organization of Hospitals Ownership Structure of Hospitals Competition among Hospitals Types of Hospitals • Four major types of hospitals: • General Medical and Surgical • Specialty • Psychiatric • Rehabilitation and Chronic Disease • Community­based hospitals serve local communities for general medical and surgical services. • Likely to face lower­risk patients than regional hospitals • Tertiary hospitals provide specialized services for severe illnesses and conditions. Tertiary hospitals may have specialty units, such as coronary intensive care, trauma or neonatal ICUs. They are usually teaching hospitals. Organization of Hospitals Physicians in Hospitals Theories of Hospital Behavior Theories of Hospital Behavior Hospitals – “Bottomless receptacles into which limitless funds can be poured.” Baumol and Bowen. Organization of Hospital – 2 organizations, hospital staff and medical staff. Hospitals provide, but physicians order. Physicians prefer enough capacity so they can get services quickly. Administration may prefer a full hospital which means longer waiting times. New technology usually a complement to physicians rather than a substitute. Usually expensive and requires highly trained labor. Without pressure of market, (owners) compete for physicians and patients by latest technology, comforts, etc. Get duplication and rapid diffusion of newest technology. Profits of Hospitals Profits of Hospitals Non­profit hospitals may be owned by a non­profit corporation, a church group, a city, a state, or the federal government. The latter are public hospitals. 70% of inpatient care is provided in private, community­ based non­profit hospitals For­profit hospitals are typically owned by a corporation or by individuals Trust­based relationship, so lower costs of contracting with patients (Arrow 1963; Weisbrod 1988) Greater elasticity in terms of rooms (access to capital) Large expansions in sizes of hospital systems over last decade Residual Claimants in Residual Claimants in Not­for­Profit Hospitals “Residuals” = Profits in usual cases Doctors claim residuals by making choices that max. own firms’ profits Administrator has utility function based on quantity and quality Why not just have docs own hospitals? Stark laws limit this integration. Employees/Patients claim by higher wages or lower prices How to specify utility and for whom? The Rise of For­Profit Hospitals The Rise of For­Profit Hospitals As the number of community hospitals has decreased, the number of for­profit hospitals has risen. These hospitals are owned by groups of investors or shareholders and have many characteristics of the standard firm. For­profit hospitals are typically specialized facilities that provide in­demand services and do not offer loss­producing services like emergency care. About 15% of all hospitals now Does form of Hospital ownership matter? Prices not very different in same market. For­ profits priced higher in expanding markets like the South and Southwest. Mergers appear to result in higher prices for both types. Less competition is dominant factor. On quality – find major teaching hospitals have better outcomes – otherwise, no differences But does pool of patients differ in ways that generate this pattern? Has led to some questioning of the need for non­ profit status as we saw last week Optimal Size of Hospital Optimal Size of Hospital Based on local demand conditions Form expectations from past use and demographic projections Need some excess capacity Economies of scale from larger facility Spread out fixed costs over larger quantity of output (number of beds) Diseconomies of scale possible? Separate wings into 100 bed units Natural monopoly in smaller markets? Short­Run and Long­Run Average Total Cost Curves Average Total Cost Per Bed Number of Bed (100s) Hospital Competition Hospital Competition Compete for physicians and patients Docs often independent from hospital, but essential for production Compete based on hospital amenities Compete in labor markets for nurses Leads to increased spending by hospitals Can lead to costlier care for patients which is a tradeoff for attracting them Competition for patients greatly affected by reimbursement changes But may be monopsony in local markets Technology investments used to attract physicians Compete for patients mostly in services such as maternity with more certainty Compete for contracts from insurance companies CON program limited hospital expansion, but was anti­competitive HHIs have increased slightly over time indicating higher concentration Negotiate fixed or discounted prices in exchange for an insurer’s promise to limit patients to their facilities Hospital Pricing Hospital Pricing Markup over costs depends on elasticity Higher elasticity results in lower markup (P – MC)/P is markup Obviously, insurance reduces demand elasticity Market elasticity is much smaller than elasticity facing each hospital Price and quality are determined jointly Proportional to market share? For­profits able/willing to price discriminate more? Competition and Quality/Cost Competition and Quality/Cost decisions for hospitals Generous insurance for hospitalization resulted in competition mainly on quality Could lead to ‘arms race’ in hospital investments to attract doctors Managed care & Medicare prospective payment limited hospital reimbursement Especially in highly concentrated areas So more competition leads to higher costs, not efficiency as we usually find! Reversed competition/cost relationship Also reduced availability of inpatient surgery (and, thus, demand for hospital services) Competition Leads to Higher Competition Leads to Higher Spending and Lower Profits Hospital 1 Add MRI (1’s profit, 2’s profit) Hospital 2 No MRI Add MRI (­$2.5 mill , (­$5 mill , + ­$2.5 mill) $2.5 mill) No MRI (+$2.5 mill , ­ (0 , 0) $5 mill) Hospital Costs Hospital Costs Hospitals have numerous costs, including: Why are differences in costs between hospitals hard to use for making conclusions on optimal size? Largest expense for operating a hospital (50­75% of total costs) is labor. Few physicians are hospital employees, so their salaries usually aren’t included in a hospital’s budget. The services of contracted professionals such as pathologists, radiologists, and ER doctors are included, however. Other common expenses include capital equipment purchases, energy, facilities costs, supplies, and advertising. Cost Shifting Cost Shifting Cost shifting, or using revenues from one group of patients to pay for or subsidize the services given to another group, has long been a feature of hospital financing. Consider the following examples: Cost shifting or simply price discrimination? A hospital may use overhead charges for patients with private insurance to help pay for charity treatment of patients who are indigent or uninsured. Fees charged for cardiovascular surgery may subsidize the operation of the emergency room. The Decline of the The Decline of the Cost­Shifting System In recent years, the use of cost shifting has in hospitals has decreased. One major reason is that hospital administrators abused the system by way of distortional cross subsidies. As a result, Medicare eventually refused to pay bills designed to subsidize care for the needy. At the same time, managed care became increasingly popular, and many managed care organizations were determined to pay only for those services used by their members and to do so at a fair price. Cost shifting implies real market power that many hospitals do not seem to have. Also increase in specialty care centers may reduce demand for high­margin hospital services (i.e. MRIs) ...
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This note was uploaded on 04/14/2011 for the course ECON 329 taught by Professor Classen during the Spring '11 term at Loyola Chicago.

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