Reflection Paper on these two chapters
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Chapter6.pptCHAPTER 6
THE HOSPITAL INDUSTRY
Bhattacharya, Hyde and Tu – Health Economics
History of hospitals
- 19th century hospitals could be fatal places to go to for medical care
- Higher mortality rates in the hospital than at home
- Late 1800s innovations helped lift hospital reputation
- Germ theory of disease
- Antiseptic techniques
- Anesthesia
- X-ray technology
- Increased demand for hospital surgeries led to increased need for more hospital resources
Bhattacharya, Hyde and Tu – Health Economics
History of hospitals
- In 1946, the Hill-Burton Act increased the number of hospitals in the US
- Congress gave monies for building hospitals
- Any hospital receiving money had to provide free/low cost care to the poor
- Result: more hospitals and more hospital beds
Bhattacharya, Hyde and Tu – Health Economics
History of hospitals
- Technology advances have reduced recovery times
- Insurer increasingly design hospital payment to incentive shorter hospital stays
- Trend toward
- Increased outpatient visits
- Decreased length of stay
For example, the Diagnostic Resource Groups (DRG) reimbursement method used by U.S. Medicare pays hospitals based on the patient’s initial diagnosis and does not depend on the number of days the patient actually spends in the hospital.
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Ch 6: The Hospital Industry
THE RELATIONSHIP BETWEEN HOSPITALS AND PHYSICIANS
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Bhattacharya, Hyde and Tu – Health Economics
Different modes of hospital-physician relationships
- Modes:
- “Physicians’ workbench” (Majority in US)
- Physicians not directly employed by hospital
- Direct employees (UK NHS; US “hospitalists”)
- Physician-owned hospitals (Japan; US)
Tradeoffs between the different modes:
Physician loyalty to hospital or the patient?
Doctors without connection to the hospital may overuse hospital resources
Bhattacharya, Hyde and Tu – Health Economics
- Surgical mortality rates decrease with increased hospital volume
- Learning-by-doing hypothesis
- High volume leads to good outcomes
- Selective-referral hypothesis
- Good outcomes leads to high volume
Positive volume-outcome correlation
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Bhattacharya, Hyde and Tu – Health Economics
Does hospital experience or physician experience matter?
- Should you prefer having your surgery with an experienced physician or in an experienced hospital?
- McGrath et al. (2000) find
- Hospitals with more surgical experience have fewer complications than physicians with high experience
- Finding makes sense if teams of medical workers collaborate on surgeries, so individual physician experience less impactful
Compare outcomes of Medicare patients undergoing surgery to unclog coronary arteries (PCI)
Experience of the hospital is more important than the attending surgeon’s experience
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Ch 6: The hospital industry
THE RELATIONSHIP BETWEEN HOSPITALS AND HOSPITALS
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Bhattacharya, Hyde and Tu – Health Economics
Differentiated product oligopoly
- Hospital industry is a differentiated product oligopoly
- Strict barriers to entry
- Buildings, technology, staff, administration, etc.
- Few firms (oligopoly)
- Services provided by each firm are not perfect substitutes (differentiated products)
- Herfindahl-Hirschman Index
- HHI = ∑ si2
- si = market share for a firm
- If HHI closer to 1 means few firms in the market (highly concentrated)
- If HHI closer to 0 means a large number of firms in the market
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Bhattacharya, Hyde and Tu – Health Economics
Limited competition
Not just due to barriers to entry. Also:
- Because of insurance,
- Prices not transparent
- Moral hazard for insured patients
- Government often sets prices
- Emergency nature of health care means that patients are unable to search for the “best” and “cheapest” hospital
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Bhattacharya, Hyde and Tu – Health Economics
Is hospital competition good for patients?
Typically, competition improves quality and lowers prices.
BUT
- Ubiquity of insurance hinders price competition
- Patients are typically referred to hospitals by physicians, so hospitals compete for physicians
- Medical arms race hypothesis: greater competition among hospitals for physicians can result in redundancy in and overconsumption of medical technologies. This can actually increase costs without improving quality
- Lots of empirical research about the effect of hospital competition on patient outcomes: mixed findings and different policy implications.
Bhattacharya, Hyde and Tu – Health Economics
For-profit and nonprofit hospitals
US hospital industry has both for-profit and nonprofit
hospitals
- Majority of hospitals are nonprofit
- 2009: 75% of private hospitals organized as nonprofits
- Benefits of nonprofit status:
- Exempt from taxes
- Donors receive a tax deduction
- Costs of nonprofit status:
- Cannot sell stock
- Cannot distribute profits to owners
- Restricted to certain charitable activities
Bhattacharya, Hyde and Tu – Health Economics
Why do nonprofits exist?
Theories for nonprofit existence
Altruistic-motive theory
- Some entrepreneurs prefer altruism over profits
Government-failure theory
- Politics ineffectively help those in need
Asymmetric information
- Donors trust nonprofits more with money
Nonprofits are for-profits in disguise
- “profits” are distributed as higher wages or non-monetary benefits
- Mixed study results
Ch 6: The hospital industry
THE RELATIONSHIP BETWEEN HOSPITALS AND PAYERS
Bhattacharya, Hyde and Tu – Health Economics
Prices vary greatly across hospitals
- According to public price lists or “chargemasters”, the cost of a chest x-ray in 2004 ranged between $120 and $1,519 across seven California hospitals
- Tremendous variability!!
- But in actuality, buyers (both insurers and patients) rarely pay the chargemaster price
- Instead, hospitals and insurers -- both private and public -- periodically negotiate rates
- Rates vary with relative bargaining power of hospital & insurer
- The same hospital may receive different rates from different insurer
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Bhattacharya, Hyde and Tu – Health Economics
Who pays for uncompensated care?
Ultimately, someone has to pay for uncompensated care.
- Unpaid hospital care is paid for through cost-shifting
- Rich patients pay for poor patients’ care (cross-subsidization)
- In the US, reimbursement rates much higher for private insurers than for Medicaid or Medicare
Uncompensated care: hospital charges not covered by out-of-pocket payments, public insurance, or private insurance.
Last-resort laws mandate that hospitals treat all patients who enter their emergency rooms.
What happens when a patient lacks the resources and insurance to pay for this care?
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