Hospitals

Outline

• Economic Rational for the Non-Profit Hospital

• How Do Hospitals Compete?

• Hospital Pricing

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

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

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 382 337 245 213 213 -44%

Private Nonprofit 3,339 3,191 3,003 2,904 2,904 -13%

For Profit 775 749 749 1,013 1,060 38%

State-Local Govt 1,761 1,444 1,163 1,068 1,010 -43%

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 210 169 131 125 40%

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

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?

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

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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

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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

Hospital FinancingPayment-to-cost ratio

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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

The decision to specialize

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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

Hospital Competition

• Policy Reaction to MAR– CON Laws

• 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

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

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.

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

Hospital Pricing

Hospital Pricing

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

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

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