1. Hospitals

2. Outline Economic Rational for the Non-Profit Hospital
How Do Hospitals Compete?
Hospital Pricing

3. Evolution of the Modern Hospital
Most hospitals in the late 19th and early 20th century functioned as almshouses and pesthouses.
Places for the poor
Funded by private charity
Those who had money could afford to die at home.
As medical science advanced the hospital came to the center of medical care

4. The History of U.S. Hospitals
Hill Burton Act of 1946 provided funding to refurbish old hospitals and to build new hospitals
The increased prevalence of health insurance in the 1950s resulted in an increase in demand for hospital services
Creation of Medicare & Medicaid increased demand
Period of downsizing
Introduction of Prospective Payment Systems
Growth of managed care

5. Hospitals by Type By Year
1975
1990
2000
2010
2013
Change
All Hospitals
7,156
6,649
5,810
5,754
5,686
-21%
Federal
382
337
245
213
-44%
Private Nonprofit
3,339
3,191
3,003
2,904
-13%
For Profit
775
749
1,013
1,060
38%
State-Local Govt
1,761
1,444
1,163
1,068
1,010
-43%

6. Hospital Beds by Type By Year (in 1000s)
1975
1990
2000
2010
Change
All Hospitals
1,466
1,213
983
942
-36%
Federal
132 98 53 45
-66%
Private Nonprofit
658
657
583
556
-16%
For Profit 73
101
110
125
71%
State-Local Govt
210
169
131
40%

7. Hospital Trends Hospital ALOS on the decline
PPS encouraging “quicker and sicker” discharges
Managed care limiting hospital stays
Growth of alternative services
Movement to outpatient settings
84% of U.S. community hospitals have less than 300 beds
Rural hospitals average 65 beds; urban hospitals 231
5.7 million hospital employees (40% of health care workforce, 4% of employed civilians)
Current trend is to downsize employment
Average hourly earnings highest among healthcare sites

8. Evolution of the Hospital
Downward trend in the number of hospitals
Expected to continue as consolidation continues and care moves out of the hospital.
For-profit hospitals are on the rise, but Nonprofits are still a large majority, why?

9. Why is the Nonprofit Hospital Dominant?
Contract failure
Asymmetric information
Shopping problem
Trust between patient and physician
Public goods
Inertia
Many “nonprofits” make a large profit
Tax exempt vs nontax exempt

10. What is the Objective a Non-Profit Hospital?
Most firms exist to maximize profits
But for a NFP, what is their objective?
“Profit” Maximization
No Margin, no mission?
Utility Maximization
Physician Control

11. How do For Profit Hospitals Compare to Private Non Profits?
Costs and Pricing
Uncompensated Care 4.5% vs 4%
Quality
Entry and Exit
NFP quicker to enter a new market and slower to exit
Bottom Line: Very hard to “see” a difference

12. Hospital Financing Payment-to-cost ratio

13. How do Hospitals Compete?
Normally competition leads to lower prices and decreased costs.
In hospitals it is often argued the opposite occurs.
Some research shows that when hospital markets become more competitive there is increased costs and higher prices to consumers
Policy implications are to discourage competition

14. The decision to specialize
Hospital 1
Basic only
Both
$7,000
$10,000
Basic Only
$7,000
$2,000
Hospital 2
$2,000
$3,000
Both
$10,000
$3,000

15. Hospital Competition Medical Arms Race “Consumer-Driven” Competition
Hospitals compete not in the price/quality space but in a “relative” competition
Physicians
Perceived quality relative to competitors
Incentive to over-invest in technology and expand into “unprofitable” services

16. Hospital Competition Policy Reaction to MAR CON Laws Anti-Trust Policy
Hospitals must justify the need is there for a particular service or facility prior to adding it.
Non CON states such as Texas have seen some of the largest examples of this type of behavior
Anti-Trust Policy
Implication is that monopolies are not so bad
Mergers that would have been blocked in other industries have been allowed in hospitals

17. Hospital Competition Evidence on MAR
Research prior to the 1990s tends to find that when markets become more competitive, then there is an increase in costs and consumers face higher prices.
Contrary to standard economic theory
Research looking at data in the 1990s found the opposite:
More competitive markets resulted in lower prices and costs
Selective contracting
By the end of the 1990s the Medical Arms Race was considered dead

18. Hospital Competition Unraveling of “Managed Care”
As consumers have demanded choice in providers, selective contracting has become much less selective
Robotic Surgery
Proton Beam Therapy
Children’s hospitals
Policy should be focused on getting providers to compete for contracts.

19. Hospital Pricing Hospital pricing has received much attention lately
Prices that private plans pay are opaque to both consumers and to payers
Details of contracts are kept secret
Complexity of medical care
Employers and employees pay the prices but are not aware of the contract details
Silos in health care

20. Hospital Pricing

21. Hospital Pricing

22. Hospital Pricing
It is clear that high prices lie at the heart of the health spending problem in the US
We don’t fully understand why prices vary across services and across providers.
Research from the Center for Studying Health System Change, September 2013
Examined 13 metropolitan areas

25. Hospital Pricing
High degree of variation in pricing both within and across markets
Larger for outpatient than inpatient
5 of the 13 markets are in Michigan which has an unusually concentrated insurance market
One insurer has 70% of market share
Yet even here there is large variation

28. Solutions? Reference Pricing
Payer sets a maximum amount for a specific procedure
Narrow Networks (selective contracting)
Other “value based” insurance contracts
“Nudge” consumer to high value providers
Regulation
All-Payer Model
Price Transparency