Chapter 13
The HospitalServices Industry
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The Structure of the Hospital Services Industry
• Actual competition– Intensity of the competition that currently
coexists among the firms in an industry– Factors influencing the degree of actual
competition• Number and size distribution of the existing firms, • Degree of product differentiation• Amount of information consumers possess.
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The Structure of the Hospital Services Industry
• Potential competition– Depends on how easy it is for new firms to
enter an industry. – Degree of potential competition can be
measured by• Magnitude of any barriers to entry resulting from
– Economies of scale– Legal impediments
» Patents» Government restrictions
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Number, Types, and Size Distribution of U.S. Hospitals
• 1980 to 2006– Number of hospitals - declined from 7,000 to
5,700– Number of hospital beds – declined by 31%– Causes:
• Increased competitive and regulatory forces • Brought on by managed care health plans and
federal cost containment measures
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Number, Types, and Size Distribution of U.S. Hospitals
• Ownership• Federal hospitals
– Operated by the federal government» Military institutions» Run by Veterans Administration
• Non-federal hospitals
• Service offerings & average length of stay• Community hospitals, • Long-term general and special, • Psychiatric, • Tuberculosis hospitals
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Number, Types, and Size Distribution of U.S. Hospitals
• Community hospitals– 86% of all hospitals– General medical and surgical services– Specialty services
• Ear, nose, and throat care; • Obstetrics and gynecology; • Orthopedic services,
– Short-term stays • Less than 30 days
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Number, Types, and Size Distribution of U.S. Hospitals
• Community hospitals– Not-for-profit hospital
• 59% of the community hospitals• Control 70% of all community hospital beds, 2006
– For-profit hospitals• 18% of all community hospitals• 14% of beds
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Measuring Market Concentration
• Hospitals– Multiproduct firms that simultaneously offer a
multitude of diagnostic and therapeutic services
• Relevant product market (RPM)– Difficult to define and measure – Defined as a cluster of hospital services– Problems:
• Hospital facilities provide different levels of care • Hospital and nonhospital providers offering partial
product lines are excluded from RPM
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Measuring Market Concentration
• Primary care services– Prevention, early detection, and treatment of
disease– Obstetrics, gynecology, internal medicine, and
general surgery.– Some diagnostic equipment to perform X-ray
and laboratory analysis.
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Measuring Market Concentration
• Secondary care– More sophisticated treatment– Cardiology, respiratory care, and physical
therapy. – Equipment and laboratory capabilities are more
sophisticated
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Measuring Market Concentration
• Tertiary care– Designed to arrest disease in process– Heart surgery, cancer treatments –
chemotherapy– More sophisticated equipment
• Community hospitals – Primary and secondary care– Some offer tertiary care.
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Measuring Market Concentration
• Research hospitals– Associated with university medical schools– Provide state-of-the-art quaternary-level care
• Relevant geographical market (RGM)– Geopolitical boundaries– Health service areas– Fixed 5- or 15-mile radius around each hospital– Based on patient flow data
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Barriers to Entry
• Barriers to entry:– State certificate of need (CON) laws– Excess capacity, – Sunk cost– Economies of scale– Learning curve effects– System affiliation
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Barriers to Entry
• Barriers to entry:– State certificate of need (CON) laws
• Deter entry and allow entrenched firms to raise prices, Noether (1987)
– Excess capacity, Schramm and Renn (1984)– Sunk cost
• Relatively huge investment in the hospital infrastructure represents a sunk cost, Baker (1988)
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Barriers to Entry
• Economies of scale– 1960s and 1970s studies confirm it, Cowing et al.,
(1983)– Newer studies: hospitals as multiproduct firms
• Long-run diseconomies of scale, average-size hospital
– Survivor theory• Efficient hospital size may have changed considerably
over time
– Long-run average cost • Of a short-term community hospital reaches its lowest
point at a size of around 200 beds ± 100 beds
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TABLE 13–1A Comparison of the Size Distribution of Community Hospitals, Selected Years 1970–2006
Percentage of Hospitalsin Each Bed Size Category
Bed Size Category 1970 1980 1990 2000 2006
0-2425-4950-99100-199200-299300-399400-499500 and over
6.8%22.625.421.810.16.13.24.0
4.4%17.725.123.512.37.14.65.4
4.2%17.423.524.313.77.64.15.3
5.9%18.521.525.113.16.93.75.0
7.6%21.619.722.712.37.23.75.3
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Barriers to Entry
• Barriers to entry:– Learning curve effects
• Evidence to support learning by doing– Farley and Ozminkowski (1992)– Stone et al. (1992)
• Learning by watching, Ho (2002)
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Barriers to Entry
• System affiliation:– Members of a multihospital system have four
advantages that may result in lower average costs
• Economic benefits – Economies of scale and access to capital;
• Improved personnel and management benefits – Ability to recruit, train and retain high-quality medical and
administrative staffs, – Expand patient referral networks, – Provide access to specialists to assist in coping with
increasingly complex environments
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Barriers to Entry
• System affiliation:– Four advantages
• Organizational benefits due to – Expansion of the service area, increased market
penetration, – Organizational survival through reduced financial deficits,
manpower shortages, and facilities problems;
• Community benefits– Improved access and quality of care through enhanced
resources, lower costs, and improved regional planning
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Barriers to Entry
• System affiliation:– Empirical evidence
• System affiliation does not lead to lower costs of production
– Ermann and Gabel (1984)– Renn et al. (1985)– Wilcox-Gok (2002)
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Number, Types, and Size Distribution of the Buyers of Hospital Services
• 2006, $648.2 billion spent on hospital services– Government, 56% (federal government, 45%)– Private sector, 44%
• 3.3% individual consumers• 36% private insurance
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TABLE 13–2Sources of Hospital Funds, 2006
Dollars (billions) Percent
Total hospital care expensesAll private funds Out-of-pocket Private insurance OtherGovernment Federal State and local
$648.2285.621.4
234.829.4
362.6290.272.4
100.0%44.13.3
36.24.5
55.944.811.2
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Number, Types, and Size Distribution of the Buyers of Hospital Services
• Reimbursement practices– Usual and customary charges,– Discounted usual and customary charges, – Per diem payments, – DRG payments, – Capitation payments
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Number, Types, and Size Distribution of the Buyers of Hospital Services
• Hospital prices and costs – can be influenced by– The government (Medicare and Medicaid)– Private sector – at local level
• Depends on chosen hospital reimbursement strategy, the competitiveness of the hospital and insurance markets, and the goals of the insurer
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Type of Product
• Product differentiation– Causes the demand curve to become less price
elastic– Enables the firm to restrict output below and
raise price above the competitive level
• Determinants of choice of hospital– Lane and Lindquist (1988)
• Quality of care and staff, • Equipment and technology,• Convenient location
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Type of Product
• Marketing and advertising– $120,000 annually on marketing,
• 0.1 to 0.2 % of sales (Barro and Chu, 2002).
– In highly competitive areas• 5% of gross sales to advertising, Gray (1986)
– 50% of marketing budget – on advertising, Japsen (1997)
• Print advertisements (43%) (newspapers and magazines)
• Radio (14%); direct mail (12%), Yellow Pages (11%), television (11%), bus/billboards (4%)
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Type of Product
• Dorfman-Steiner approach
Hospital = Monopolist– Q = Q(P,A)– P = price of hospital services– A = advertising expenditures– Q = quantity demanded of hospital services
• Increases when P decreases• Increases when A increases
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Type of Product
• Dorfman-Steiner approach– EP = price elasticity of market demand in
absolute terms
– EA = advertising elasticity of demand• Percentage change in quantity demanded resulting
from a one-percentage-point change in advertising expenditures.
• Measures the responsiveness of consumer demand to a change in advertising expenditures
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Type of Product
• Dorfman-Steiner approach– Profit-maximizing amount of advertising
intensity (A/TR)
( )
A
P
A
A ETR E
A P MCE
TR P
- Advertising intensity is larger when• Quantity demanded is more responsive to
advertising• The gap between price and marginal cost is greater
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Type of Product
• Implications of Dorfman-Steiner model– A profit-maximizing hospital advertises more
intensely when the advertising elasticity is higher
– Advertising expenditures are greater when demand is less elastic with respect to price
– Firms with greater market power tend to advertise their products more aggressively, all other factors held constant
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Type of Product
• Hospital = Oligopolist– Advertising could have
• An industry expansion effect• A market share expansion effect
• Industry expansion effect• Advertising by a single hospital may expand the size
of the entire industry
• Market share effect• Persuasive advertising may allow a hospital to
attract some of its rivals’ customers• Diminishing returns to advertising expenditures
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Type of Product
• Town and Currim (2002)– Hospital advertising intensity
• Greater in more concentrated market areas
– For-profit hospitals • Did not advertise any differently than their not-for-
profit counterparts
– Hospitals spend more on advertising• Attempt to attract a greater share of the more
profitable Medicare and HMO patients
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The Conduct of the Hospital Services Industry
– Pricing behavior of not-for-profit hospitals– Empirical findings about the relation between
hospital market structure and various measures of conduct
• Price, costs, and quality.
– Effects of ownership structure, managed care, and government regulations on the conduct of hospitals
– Economics of integrated delivery systems
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Pricing Behavior of Not-for-Profit Hospitals
• Utility maximization models– Assume that the manager of a not-for-profit
hospital attempts to maximize his or her own personal utility
• Quantity maximization, Baumol (1967)– Maximize output subject to a break-even level
of profits• Managers try to expand sales at the expense of
profits
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FIGURE 13–1The Output Maximization Model
P1
Number of patient-days (Q)
D=AR
Dollarsperunit
MR
Q1
ACMC
Q0
P0
If so, the not-for-profit firm produces more services (Q0) but charges a lower price (P0) than an otherwise comparable for-profit hospital (P1, Q1).
Suppose the typical not-for-profit hospital faces a downward-sloping demand curve and the usually shaped average and marginal cost curves and attempts to maximize the quantity of hospital services subject to a break-even constraint (P = AC).
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Pricing Behavior of Not-for-Profit Hospitals
• Quantity maximization model – Long-run implications:
• Hospital may generate some profits to acquire the funds it needs for expansion
• Price - slightly above the average cost of production• Provide more output • Have a higher rate of expansion over time than the
profit-maximizing hospital
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Pricing Behavior of Not-for-Profit Hospitals
• Quantity maximization model – Not-for-profit hospital
• Firm - restricted by law from distributing profits• Managers: maximize quantity
– Increase the firm’s market share – Enhance its prestige in the community
• Board of trustees, or board of directors– Maximize quantity to increase their presence in the
community
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Pricing Behavior of Not-for-Profit Hospitals
• Quantity maximization model – Excess capacity in hospital services
• Acquire an additional piece of medical equipment even if it does not generate a profit
– If it may attract a sufficient number of additional admittances.
• Duplication of resources and overcapacity
– Cannot explain why the cost of hospital services has been rising so rapidly
• Static rather than a dynamic view of hospital behavior
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Pricing Behavior of Not-for-Profit Hospitals
• Quality maximization model, Lee (1971) – Managers of not-for-profit hospitals maximize
utility • By attempting to enhance the status of their hospital• Maximize quality
– Any increase in the quality of care• Likely to drive up the cost of producing medical
services• Relatively inelastic demand for hospital services
– Any increase in the cost - can be passed on to the payer through a higher price
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Pricing Behavior of Not-for-Profit Hospitals
• Quality and Quantity maximization – Feldstein (1971) and Newhouse (1970)– Management
• Determines the quantity and quality of output• Produces the levels that maximize utility
– Trade-off• Increased quality – at the expense of quantity
– Management – choose that mixture of quantity and quality that maximizes their personal utility
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FIGURE 13–2The Impact of Changes in Quality on Costs
Number of patient-days (Q)
D
Dollarsperunit
Q1
AC0
Q0
AC1
A
B
A not-for-profit hospital that chooses to produce with higher quality faces increased costs of AC1. As a result, the hospital must produce fewer services (Q1) when faced with a break-even constraint.
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FIGURE 13–3The Quality/Quantity Maximization Model
Number of patient-days
Quality
B
A
This figure shows the various combinations of quality and quantity of hospital services that can be produced given a fixed budget constraint. To maximize their utility and given the trade-off, decision makers at a not-for-profit hospital must choose a specific point such as A or B, given their preference weights for the two goods
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Pricing Behavior of Not-for-Profit Hospitals
• Managerial expense preference model – Williamson, (1963)– Managers use their authority
• To divert funds away from profits• To serve their own self-interests
– Enhance their own utility
– Pursue the five Ps of increased pay, perquisites, power, prestige, and patronage
– Asymmetry of information between the stockholders and the managers
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Pricing Behavior of Not-for-Profit Hospitals
• Managerial expense preference model – Maximize discretionary expenditures
• Choose the profit-maximizing level of output and price
• Then absorb the profits through discretionary expenditures
– Rent-seeking behavior• Manager – wants a bigger slice of the pie for herself
rather than trying to enlarge the size of the pie
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Pricing Behavior of Not-for-Profit Hospitals
• Managerial expense preference model • Implications
– Managers consciously drive up the cost of production
– Explains the behavior of not-for-profit firms• Managers maximize profits
– Then absorb all profits as discretionary income
• Higher costs than for-profit firms
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FIGURE 13–4The Managerial Expense Preference Model
Quantity (Q)
D
Dollarsperunit
MR
Q0
P0
MCtrue, ACtrue
A
CEXP
E
The difference is that the not-for-profit hospital uses the discretionary profits to finance unnecessary expenditures and thereby raises the costs of production to CEXP, a point above the true costs of production. The not-for-profit hospital reports the same price and quantity of services as the for-profit hospital but shows no economic profit.
A not-for-profit hospital that maximizes discretionary profits will choose to produce at Q0 where MR = MC just like an otherwise comparable for-profit hospital.
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Pricing Behavior of Not-for-Profit Hospitals
• Utility maximization models explain– How firm behavior is affected
• When managers address their own utility functions • Rather than attempting to maximize profits
– Why the health care sector may tend toward duplication of resources and overspecialization
– Why health care costs have increased over the years
• Lack of concern for the bottom line causes the cost of medical care to increase.
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Inside the Black Box of the Hospital
• Harris (1977)– Hospital = firm designed to solve a complicated
decision problem – the diagnosis and treatment of illness
– Hospital = split organization resulting from an internal market composed of demanders and suppliers
• Suppliers – administrators• Demanders - physicians
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Inside the Black Box of the Hospital
• Harris (1977)– Excess capacity
• Reasonably well allocation of resources• Potential for rent-seeking behavior from physicians• Conflict between physicians and administrators
– Physicians – want excess capacity– Administrators – full hospital
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Market Concentration and Hospital Behavior
• Impact of market concentration– On the price, cost, and quality of hospital care
• Medical arms race hypothesis– Robinson and Luft, (1985)– Hospitals in more competitive areas
• Provide physicians with greater levels of hospital quality
– Advanced medical technologies; Excess bed capacity; Amenities
• In return for admitting their patients
– Higher quality = higher costs
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Market Concentration and Hospital Behavior
• Medical arms race, empirical evidence– Data prior to mid- 1980s
• Increased competition / lower HHI– Increased hospital costs (Hersch,1984; Robinson and Luft,
1985; White, 1987; Noether, 1988; Fournier and Mitchell, 1992),
– Lower levels of technical efficiency (Wilson and Jadlow, 1982),
– Greater excess bed capacity (Joskow, 1980; Farley, 1985), – Larger number of duplicate specialized services in local
markets (Dranove et al., 1992; Farley, 1985)
– Data after the mid-1980s: No support
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Market Concentration and Hospital Behavior
• Empirical evidence, after mid-1980s– Increased competition
• No impact on hospital costs (Zwanziger and Melnick, 1988),
• Lowered the hospital inflation rate (Robinson and Phibbs, 1990), or
• Increased costs of not-for-profit hospitals but not the costs of public and for-profit hospitals (Santerre and Bennett, 1992).
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Market Concentration and Hospital Behavior
• Empirical evidence, after mid-1980s– More recent data
• Payer-driven competition
– Increased hospital competition• Improves technical efficiency (Rosko,2001), • Reduces excess capacity (santerre and adams,
2002), • Lowers hospital prices (Town and Vistnes, 2001)• Lowers hospital costs, and results in lower rates of
adverse outcomes (Kessler and McClellan, 2000).
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Market Concentration and Hospital Behavior
• Hospital consolidations during the 1990s– Price increases (Town and Vistnes, 2001)– Lower growth in costs and prices (Spang et al.
2001)– Does not generate savings even after four years
(Dranove and Lindrooth 2003)– Mergers - result in savings for two or more years
after consolidation (Dranove and Lindrooth 2003)
– No evidence it improves the quality of care
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Hospital Ownership and Hospital Behavior
• Costs, prices, and quality of care– Reasonably similar across differently owned
hospitals
• Public hospitals – Provide greater amounts of uncompensated
care
• Uncompensated care – Bad debts and charity– Measured as a percent of total hospital
expenses
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Hospital Ownership and Hospital Behavior
• Why do for-profit hospitals provide any uncompensated care?– Low marginal cost– Favorably impact hospital’s relationship with
regulatory agencies and the community at large
• Not-for-profit hospitals– Tax-exempt – Expected to provide charitable care– Uncompensated care - only 5% of expenses
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57
Hospital Ownership and Hospital Behavior
• Not-for-profit hospitals– 20% of all not-for-profit hospitals do not provide
uncompensated care sufficient to compensate for the tax subsidies they receive
– Nicholson et al. (2000) • Not-for-profits should be expected to provide
community benefits equal to those provided by for-profit hospitals plus the profits these hospitals earn
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58
Managed-Care Buyers and Hospital Behavior
• Managed care – Incentives for efficiency without seriously
sacrificing quality?– Greater pressure from HMOs
• Improves the degree of technical efficiency experienced by hospitals
– Inpatient outcomes are not systematically worse
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59
Managed-Care Buyers and Hospital Behavior
• Similar quality-of-care in MCO and non-MCO plans– Empirically
• Very difficult to distinguish among health plans
– Some MCOs - structured as not-for-profit firms – MCOs often invest huge sums of money
establishing brand names– Physicians that contract with MCOs
• Subscribe to the same basic ethical code of conduct as the doctors that deal with traditional insurers
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60
Managed-Care Buyers and Hospital Behavior
• Prospective UR– Necessity of hospital care while it is still being
planned– Capacity to change or avert planned treatments
• Prior authorization• Second opinions
• Concurrent review– Necessity of continual care for patients– Intervenes to change planned treatments
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61
Managed-Care Buyers and Hospital Behavior
• Retrospective UR– Review care after the fact from records and
claims– Little potential to directly affect care provided to
patients– Alter the practice patterns of providers that face
retrospective denial of reimbursement
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62
Price Regulations and Hospital Behavior
• States –establish rate-setting programs– Regulation of hospital fees can lower health
care costs– Schneider (2003)
• Rate regulation – accomplished its cost-control objective in the early years
– Not sustainable over time.
• In more concentrated markets– Increasingly higher operating costs over time
– Relation between rate setting and quality of care – mixed evidence
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63
Cost Shifting Behavior
• Cost shifting – Lower reimbursement rates for public programs
lead to higher prices paid by private payers– Empirical evidence – mixed
• Inconclusive, Hadley and Feder (1985) and Zwanziger et al. (2000)
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64
L
FIGURE 13–5Analysis of Hospital Cost Shifting
D
$
MR
Q0
P0
A
Suppose the two submarkets are in an initial equilibrium represented by R0, the Medicare reimbursement rate, and point A. The latter point reflects that the hospital is initially operating at the profit-maximizing number of private-pay patients. If the government lowers the Medicare reimbursement rate to R1, the hospital will not raise private price to finance the Medicare loss, L, because price is already at the profit-maximizing level in the private submarket. Hence cost shifting does not occur in this case.
Private-pay patients (Q)
Private-pay Submarket
MCP2
B
Q2
$
M0 Medicare patients (M)
Medicare Submarket
MCR0
R1
However, if the hospital is initially operating with some unexploited market power, as at point B, where the number of private-pay patients is maximized (rather than profits), hospitals may raise price in response to the Medicare loss. Thus cost shifting can occur. The ability to raise price in this case depends on the magnitude of the price elasticity of demand.
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65
Integrated Delivery Systems
• Horizontal mergers– Among individual physician practices– Among individual hospitals– Because of:
• Increased market power is sought• Economies of scale• Economies of scope• Other cost advantages
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66
Integrated Delivery Systems
• Integrated delivery system (IDS)– Combines physicians and hospitals– Into a vertically integrated organization
• Single ownership and structure• Single chain of authority• Single bottom line
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67
Integrated Delivery Systems
• Four types of IDSs– Physician-hospital organization– Management service organization– Foundation model– Integrated health organization
• IDSs– Differ in the degree to which risk, governance,
revenue and capital, planning, and management are shared
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68
Integrated Delivery Systems
• Agency theory– The principal / owner of the firm enters into a
multitude of contracts• Implicitly or formally• With other firms / agents who are the suppliers of
inputs.
– Each contract stipulates• Input / product that will be provided,• Price that will be paid• Other terms of the agreement (product quality and
time of delivery)
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69
Integrated Delivery Systems
• Agency theory– Firm = nexus of many contracts
• Facilitator and coordinator of the many contracts• Responsible for transforming the resulting inputs into
an output or multiple outputs
– Flexibility
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70
Integrated Delivery Systems
• Transaction costs economics– Why firms choose to produce inputs internally
rather than contracting out– Transaction costs
• Associated with the negotiating, writing, and enforcing of contracts
• Includes the costs of searching out the best price and quality
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71
Integrated Delivery Systems
• Transaction costs economics– Many contracts are incomplete
• Not all possible contingencies can be written into a contract
• Bounded rationality in the face of uncertainty– Limited capacity of the human mind to formulate and solve
problems
• Some stipulations require renegotiation– Potential for opportunistic behavior– Increases the cost of contractual relationships.
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72
Integrated Delivery Systems
• Transaction costs economics– Firms sometimes find internal production more
efficient than outsourcing• Due to the relatively high cost of contracting
– Firms should continually find it optimal to vertically integrate
• Through greater internal production or by merging with suppliers
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73
Integrated Delivery Systems
• Transaction costs economics– Larger firm
• High monitoring costs and Inefficient behavior
– Compensation - tied to performance or profits • To align the interests of the principal and agents
– As firm gets too large• Managerial diseconomies - because of bounded
rationality• The loss of control, breakdowns in communication,
and loss of innovativeness
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74
Integrated Delivery Systems
• Transaction costs economics– Transaction costs depend on
• Degree of market uncertainty• Number of suppliers in the market• How often the service or input must be obtained
– More uncertain market conditions• Fewer suppliers• Greater frequency of use is greater• Greater transaction costs• Internal production – more efficient
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75
Integrated Delivery Systems
• Hospitals and physician practices– Vertical integration
• Lower transaction costs• Can impose incentive problems in large
organizations
• Relationship between a hospital and physicians = virtual integration– Combination of two or more organizations takes
place through contractual relationships • Rather than through unified ownership
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76
Integrated Delivery Systems
• Coordination• Deals with how the individual parts are woven into
an overall productive unit
• Governance • Considers who controls the firm’s policies• How much flexibility the firm has • To adapt and modify its policies when confronted
with changing external events
• Clinical innovation• A function of the entrepreneurial, risk-taking spirit
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77
The Performance of the Hospital Services Industry
– Growth of hospital expenditures, – The hospital inflation rate, – Hospital input utilization in the aggregate– Aggregate performance of the hospital services
industry in the United States
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78
Growth in Hospital Expenditures
• Expenditures on hospital services– Spending on inpatient and outpatient services– 30-40% of all health care spending– As percentage of GDP
• Increased to 4.6 % in 1995• Decreased to 4.2% in 2000
– Success of managed care at controlling hospital costs
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79
Table 13–3Hospital Expenditures in U.S., Selected Years, 1960–2006
Year
Total HospitalExpenditures
(billions of dollars)
Spending as aPercentage of GrossDomestic Product
19601970198019901995200020052006
$ 9.227.6
101.5253.9343.6413.1605.5648.2
1.7%2.73.64.44.64.24.94.9
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80
Growth in Hospital Expenditures
• Expenditures on hospital services= Price * Quantity of hospital services– Change in hospital expenditures over time
• Higher price changes,• Increased quantity of services, • Both
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81
Hospital Services Price Inflation Rate
• Hospital services index– Follow the transaction prices of selected
services over time– While keeping constant price-determining
characteristics• Length of stay• Medical reason for the visit
• Transaction price• Actual amount the hospital receives from the
insurance carrier and/or the patient’s out-of-pocket payments
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82
FIGURE 13–6General and Hospital Services Price Inflation, 1979–2007
1975 1980 1985 1990 1995 2000 2005 20100
2
4
6
8
10
12
14
16
General Price Inflation Hospital Services Price InflationYear
Rate
of I
nflati
on (p
erce
nt)
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83
Hospital Services Price Inflation Rate
• Hospital services inflation rate– Exceeded the general price inflation rate
• In every year but one over the 25-year span
– Double-digit inflation rates• Eight times throughout the time span• Unlike the entire economy, which faced double-digit
inflation only twice
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84
Hospital Services Price Inflation Rate
• Hospital services inflation rate– Hospital prices continued to rise more quickly
than the prices of other goods• Despite the introduction of Medicare PPS & other
public and private cost containment practices after 1983,
– Increased managed care enrollments• May have had a disinflationary impact on hospital
service prices during the early to late 1990s
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85
Hospital Input Usage and Utilization
• Hospital performance indicators– Hospital staffing ratio
• Number of full-time equivalent personnel per weighted sum of outpatients and inpatients
– Occupancy rate• Average daily inpatients per bed
– Admission rate per 100 population– Average length of stay
• Average days per patient
– And outpatient visits per 100 population
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86
Hospital Input Usage and Utilization
• Hospital staffing ratio– Increased throughout the period 1975–2006– May reflect the more severely ill patients
resulting from the Medicare PPS– May represent the expense preferences of
hospital administrators– May signify the continuing ability of hospitals to
generate revenues to support their not-for-profit orientation toward providing more services to patients
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87
Hospital Input Usage and Utilization
• Hospital occupancy rate– Declined to slightly under 62 % in 1996
• Decline – began one year before the Medicare PPS– Excess beds
– Risen slightly to roughly 67% in 2006• Competition
• Hospital admission rate– 16 per 100 population from 1975 to 1982– 11.8 admissions per 100 population in 2006
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88
Hospital Input Usage and Utilization
• Average length of stay (ALOS)– 7.6 days in the years preceding Medicare PPS. – 7.1 days in 1985– Leveled off through 1990.– Fell from 7.2 to 5.6 days, 1991 to 2006
• Hospitals responded to the per-case charge of the Medicare PPS
• Outpatient visit rate– Continually increased since 1985
– From 66 to 200 outpatient visits per 100 population in 2006
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89
Hospital Input Usage and Utilization
• Do hospitals provide inappropriate care or flat-of-the-curve medicine?– Significant levels of inappropriate use
• Chassin et al. (1987) • Winslow et al. (1988)
– Very low inappropriate rates • Leape et al. (1993), • Hilborne et al. (1993),• Bernstein et al. (1993)
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90
Hospital Input Usage and Utilization
• Do hospitals provide inappropriate care or flat-of-the-curve medicine?– Some evidence to support “flat-of-the-curve”
medicine in the case of additional Medicare spending, Fisher et al. (2003a, 2003b)
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91
Hospital Input Usage and Utilization
• The concentration of health care expenditures– Distribution of health care expenditures
• Concentrated among a small fraction of people • Major users of health care services
– Severely ill patients – Receiving high-cost critical care in hospitals.
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92
Hospital Profit Margins
• Total hospital margin– Payments received for inpatient and outpatient
care services from all types of payers – Plus any non-patient revenues– Less total hospital expenditures
• Profit margins vary considerably – Rural and metropolitan hospitals,– Nonteaching and teaching hospitals,– Hospitals with different payer mixes
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93
FIGURE 13–7Total Operating Margins for U.S. Hospitals and the Manufacturing Sector, 1981 to 2006
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
0
1
2
3
4
5
6
7
8
9
Total Hospital Margin TotalManufacturing MarginYear
Perc
ent