Health Economics & Health Economics & PolicyPolicy33rdrd Edition Edition

James W. HendersonJames W. Henderson

Chapter 9Chapter 9

The Market for Hospital The Market for Hospital ServicesServices

Factors Transforming Factors Transforming the Hospital Industrythe Hospital Industry

Germ theory of diseaseGerm theory of disease Advances in medical technologyAdvances in medical technology

– PharmaceuticalsPharmaceuticals– Diagnostic imagingDiagnostic imaging– Surgical practicesSurgical practices

Increased urbanization and Increased urbanization and mobilitymobility

2020thth Century Hospitals Century Hospitals

1900-1920: Flexner Report led to 1900-1920: Flexner Report led to medical school /hospital affiliationsmedical school /hospital affiliations

1920s: Physician licensing and hospital 1920s: Physician licensing and hospital privileges; role and trainings of nursesprivileges; role and trainings of nurses

1930s: Health insurance beginnings; 1930s: Health insurance beginnings; important drug discoveriesimportant drug discoveries

1940s: IRS rulings that health benefits 1940s: IRS rulings that health benefits are tax deductible and tax exemptare tax deductible and tax exempt

1950s: Advances in drugs and 1950s: Advances in drugs and technologytechnology

2020thth Century Hospitals Century Hospitals

1960s: Medicare and Medicaid passed1960s: Medicare and Medicaid passed 1970s: Explosive growth; development 1970s: Explosive growth; development

of expensive procedures and of expensive procedures and technology; double digit increases in technology; double digit increases in HCE annuallyHCE annually

1980s: Hospital DRGs; HCE/GDP > 10%1980s: Hospital DRGs; HCE/GDP > 10% 1990s: New forms of managed care to 1990s: New forms of managed care to

control costscontrol costs

U.S. Institutional U.S. Institutional SettingSetting

Hospital classificationHospital classification– Community hospitalsCommunity hospitals– Teaching hospitalsTeaching hospitals– Private for profit, private not-for-Private for profit, private not-for-

profit, public not-for-profitprofit, public not-for-profit Hospital spendingHospital spending Hospital market structureHospital market structure

Community Hospital Community Hospital Characteristics, 1970-2001Characteristics, 1970-2001

Measure 1970 1980 1985 1990 1995 1998 2000 2001 No. of hospitals 5,859 5,904 5,784 5,420 5,194 5,015 4,915 4,908 Beds (thousands) 848.2 992.0 1,003.1 929.4 872.7 840.0 823.6 826.0 Beds per 1,000 population

4.17 4.38 4.06 3.73 3.32 3.11 2.93 2.90

Admissions (thousands) 29,252 36,143 33,449 31,181 30,945 31,812 33,089 33,814 Admissions per 1,000 population

144.0 159.6 135.6 125.4 117.9 117.7 117.6 118.7

Resident U.S. Population

203.2 226.5 247.1 248.7 262.5 270.3 281.4 284.8

Average length of stay (days)

7.7 7.6 7.1 7.2 6.5 6.0 5.8 5.7

Percent occupancy 78.0 75.4 64.8 66.8 62.8 62.5 63.9 64.5 Outpatient visits (millions)

133.5 202.3 218.7 301.3 414.3 474.2 521.4 538.5

Outpatient visits per admission

4.57 5.60 6.54 9.66 13.39 14.91 15.76 15.93

Outpatient surgeries as a percent of total

- 16.3 34.6 50.5 58.1 61.6 62.7 63.0

Cost per day ($) 74 245 460 687 968 1,067 1,149 1,217 Cost per stay ($) 605 1,851 3,245 4,947 6,216 6,386 6,649 6,980 Source: Statistical Abstracts of the United States, various years; and National Center for Health Statistics (1996); and Health, United States, 2003: With Chartbook on Trends in the Health of Americans, Tables 95, 106, and 122, 2003.

Community Hospitals, Community Hospitals, by Ownership Typeby Ownership Type

Year Number of hospitals

For Profit

Nongovernment Not-for-Profit

Government

No. % No. % No. %

1975 5,875 775 13.2 3,339 56.8 1,761 30.0 1980 5,830 730 12.5 3,322 57.0 1,778 30.5 1985 5,732 805 14.0 3,349 58.5 1,578 27.5 1990 5,384 749 13.9 3,191 59.3 1,444 26.8 1995 5,194 752 14.5 3,092 59.5 1,350 26.0 1998 5,015 771 15.4 3,026 60.3 1,218 24.3 1999 4,956 747 15.1 3,012 60.8 1,197 24.1 2000 4,915 749 15.2 3,003 61.1 1,163 23.7 2001 4,908 754 1534 2,998 61.1 1,156 23.6

Year Number of beds (thousands)

For Profit

Nongovernment Not-for-Profit

Government

No. % No. % No. %

1975 941.8 73.5 7.8 658.2 69.9 210.2 22.3 1980 988.4 87.0 8.8 692.5 70.0 208.9 21.2 1985 1,000.7 103.9 10.4 707.5 70.7 189.3 18.9 1990 927.4 101.4 11.0 656.8 70.8 169.2 18.2 1995 872.7 105.7 12.1 609.7 69.9 157.3 18.0 1998 840.0 113.0 13.4 587.7 70.0 139.4 16.6 1999 829.6 106.8 12.9 586.7 70.7 136.1 16.4 2000 823.6 109.9 13.3 583.0 70.8 130.7 15.9 2001 826.0 108.7 13.2 585.1 70.8 132.2 16.0 Source: Health, United States, 2003: With Chartbook on the Health of Americans, Table 106, 2003.

The Role of Not-for-The Role of Not-for-profitsprofits

Not-for-profit organizational formNot-for-profit organizational form– Right to transfer assetsRight to transfer assets– Capital funds from donationsCapital funds from donations– Use of surplus funds restrictedUse of surplus funds restricted– Total liquidation transferred to trustTotal liquidation transferred to trust

Nature of competition in the not-for-Nature of competition in the not-for-profit sectorprofit sector– Medical arms raceMedical arms race– When you run out of money, you run out of When you run out of money, you run out of

options – maintain 3-5% marginsoptions – maintain 3-5% margins

Pricing Practices in Pricing Practices in MedicineMedicine

Price discriminationPrice discrimination Cost shiftingCost shifting

Charges and discounts for Charges and discounts for diagnostic bilateral mammogramdiagnostic bilateral mammogram

Hospital (Location) Official charge

Medicaid Medicare HMOs, Health plans

Policy on Uninsured

UCLA Medical Center (Los Angeles)

$460 $127 $90 Up to $242 Gives discounts based on individual's ability to pay, says CFO

Sergio Melgar

Oregon Health & Science University (Portland)

$240 $65 $59 Average $128

Works with uninsured patients to help them find financial aid; offers

sliding scales, payment plans

Jamaica Hospital (Queens, N.Y.)

$351 $50 $96 $40 to $78 Has sliding fee scales for uninsured, says CEO David Rosen

Johns Hopkins Hospital & Health System (Baltimore)

$261 $156 $173 $186 State regulation of charges reduces disparity between bills to

insured and uninsured

Grinnell Regional Medical Center (Grinnell, Iowa)

$285 $73 $79 $119 to $190

Works with uninsured to set a payment schedule

Source: Lucette Lagnado, “A Young Woman, An Appendectomy, And a $19,000 Debt,” Wall Street Journal, March 17, 2003, A1.

Models of Hospital Models of Hospital BehaviorBehavior

Utility maximizing modelsUtility maximizing models Physician-control modelsPhysician-control models

The Trend Toward The Trend Toward Multi-hospital SystemsMulti-hospital Systems

The theory of consolidationThe theory of consolidation– Reasons for consolidationReasons for consolidation

Empirical evidenceEmpirical evidence