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Classen_HealthEcon_Class28_posted - Hospital Competition...

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Unformatted text preview: Hospital Competition Hospital Competition Class 28 Health Economics Loyola University Chicago April 6, 2011 Lecture Outline Lecture Outline Competition among Hospitals ‘Arms race’ in technology 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. Hospital Competition Hospital Competition Compete for physicians and patients Docs often independent from hospital, but essential for production Compete based on hospital amenities 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 Negotiate fixed or discounted prices in exchange for an insurer’s promise to limit patients to their facilities Technology investments used to attract physicians Compete for patients mostly in services such as maternity with more certainty Compete in labor markets for nurses Compete for contracts from insurance companies 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) 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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