Chapter 13 The Hospital Services Industry (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part,

Chapter 13

The HospitalServices Industry

(c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use


2

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.


3

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


4

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


5


• 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


6


• 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


7


• 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


8

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


9


• 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.


10


• Secondary care– More sophisticated treatment– Cardiology, respiratory care, and physical

therapy. – Equipment and laboratory capabilities are more

sophisticated


11


• 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.


12


• 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


13

Barriers to Entry

• Barriers to entry:– State certificate of need (CON) laws– Excess capacity, – Sunk cost– Economies of scale– Learning curve effects– System affiliation


14

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)


15

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


16

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


17

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)


18

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


19

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


20

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)


21

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


22

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


23


• Reimbursement practices– Usual and customary charges,– Discounted usual and customary charges, – Per diem payments, – DRG payments, – Capitation payments


24


• 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


25

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


26

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%)


27

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


28

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


29

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


30

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


31

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


32

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


33

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


34

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


35

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).


36


• 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


37


• 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


38


• 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


39


• 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


40


• 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


41

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.


42

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


43


• 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


44


• 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


45


• 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


46

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.


47


• 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.


48

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


49

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


50

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


51


• 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


52


• 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).


53


• 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).


54


• 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


55

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


56


• 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


57


• 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


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


59


• 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


60


• 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


61


• 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


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


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)


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.


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


66


• Integrated delivery system (IDS)– Combines physicians and hospitals– Into a vertically integrated organization

• Single ownership and structure• Single chain of authority• Single bottom line


67


• 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


68


• 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)


69


• 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


70


• 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


71


• 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.


72


• 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


73


• 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


74


• 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


75


• 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


76


• 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


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


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


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


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


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


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)


83


• 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


84


• 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


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


86


• 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


87


• 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


88


• 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


89


• 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)


90


• 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)


91


• 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.


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


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

Documents

Chapter 13 The Hospital Services Industry (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part,