Transcript Document

Chapter 12:The Hospital
Industry
Learning Objectives
• In this chapter, you will learn about:
– the role of managed care and prospective
payment as incentives for hospital efficiency
– how inefficient hospitals become prime
targets for acquisition by multihospital chains
– how competition led to a medical arms race in
the 1980s and cost efficiencies in the 1990s
A Brief History of American
Hospitals
• Three important factors served to transform
hospitals into the modern medical institutions
they have become today: the germ theory of
disease, advances in medical technology, an
increased urbanization
– The development of the germ theory of
disease, first articulated by Louis Pasteur in
1870, revolutionized the treatment of diseases
– Now, hospital technology—especially
advances in surgical and diagnostic
imaging—provided physicians with the tools
that would revolutionize medical intervention
– Urbanization, also played an important role in
the centralization of medical facilities
A Brief History of American
Hospitals
• When hospitals were financed through
taxation and philanthropy, patient fees
were only of minor importance
– As middle-class use of hospital services
increased, changes in financing were
inevitable
• What has become to be known as the
modern hospital began to emerge in the
twentieth century
A Brief History of American
Hospitals, continued.
• 1900–1915: The Flexnor Report (1910) served as a pointed
condemnation of medical education. In its wake, bogus
medical schools were closed, standards became more
stringent, and the goal of scientific medicine was employed
• 1920s: Continued reforms were aimed at driving
incompetent physicians out of the profession
• 1930s: The reliance on patient fees caused severe financial
problems for hospitals during the Great Depression
– The introduction of private health insurance during the
decade would transform medical care financing.
– The decade also saw a revolution in pharmaceuticals
• 1940s: Wartime demands resulted in a sharp increase in
the number of physicians and nurses in training
– The passage of the Hill-Burton Act in 1946 dedicated the
government to replacing the aging hospital infrastructure
A Brief History of American
Hospitals, continued.
• 1950s: Vaccines against polio and rubella marked the
true beginning of high technology medicine
– These developments, combined with the widespread
use of antibiotics, helped change the image of
medicine
– Advances in medical research tools highlighted the
decade
– 1960s: Congress created Medicare and Medicaid,
making the federal government the major purchaser
of healthcare services
– The decade also witnessed the beginnings of the
investor-owned, for-profit hospital system
A Brief History of American
Hospitals, continued.
• 1970s: Explosive growth typified the medical care
system
– New hospitals and clinics, medical school
admissions, foreign-educated doctors, open heart
surgery, transplants, and helicopter ambulances were
widespread
– The intensity of medical interventions also increased
dramatically
• Intensive care units (ICUs) became widely used
• Trauma centers were established in most areas
– All the developments of the 1970s shared one thing in
common: they were all expensive
A Brief History of American
Hospitals, continued.
• 1980s: By 1982, healthcare expenditures exceeded 10
percent of gross domestic product for the first time
– Medicare initiated a new hospital reimbursement
method based on the diagnosis, rather than the
services performed
• 1990s: Managed care has been the dominant factor
affecting medical care delivery during this decade
– Hospitals are no longer the revenue generators they
once were, but instead they have become cost
centers
– Horizontal integration—characterized by hospital
mergers and consolidations—transformed an industry
once highly fragmented with many stand-alone
facilities, into one where multihospital systems are
common
The U.S. Institutional Setting
• Hospital Classification
– Hospitals are classified according to the length of
stay, the major type of service delivered, and the type
of ownership
• Community Hospitals
– Under the current classification method adopted in
1972, a community hospital is defined as a short-stay
hospital, providing not only general services, but also
specialty care, including obstetrics and gynecology;
eye, ear, nose and throat; and rehabilitation and
orthopedic services
– More than 85 percent of all nonfederal hospitals are
classified as community hospitals.
The U.S. Institutional Setting
• Teaching Hospitals
– About 20 percent of all hospitals in the United
States have an affiliation with one or more of the
nation’s 125 medical schools and sponsor at least
one residency training program
– More than 400 hospitals belong to the Council of
Teaching Hospitals of the Association of
American Medical Colleges
– Most of the teaching hospitals are located in
major metropolitan areas with populations in
excess of one million
Structure of the Hospital Market
• Economics predicts that competition in most
markets improves economic welfare
– This improvement in economic welfare comes
as a result of lower prices, improved
efficiency, and higher quality
– Competition may be viewed from the
perspective of how well a market fits the
characteristics of the perfectly competitive
model
• Hospital markets may not fit the competitive
model very well because so many of the
structural characteristics of perfect competition
are violated
The Tend Toward Multihospital
Systems
• The Theory of Consolidation
– Mergers, acquisitions, and other forms of
consolidation occur in the hospital industry for
the same reasons that they occur in any other
industry
– Firms are said to experience economies of
scale when the long run average costs fall as
the size of the operation expands
• If economies of scale are to result in
improved efficiency, a number of technical
advantages must be realized because of
increased size
Summary
• Hospital care tends to be the most expensive
aspect of healthcare delivery
• Dominated by the private not-for-profit hospital,
the industry is responsible for more than onethird of all healthcare spending
• The changes that began in the 1980s pushed
hospitals to become competitive and profit
oriented
– This corporate mentality has led to extensive
local marketing, leveraging debt, multihospital
chains, and administrators earning salaries
rivaling corporate executives
Chapter 13: The Pharmaceutical
Industry
Learning Objectives
• In this chapter, you will learn about:
the underpinnings of pharmaceutical
drug pricing
– how the government intervenes to promote
the safety of the population
– the health of the market for prescription drugs
Drug Costs
• This chapter will help you to understand why
drugs are priced as they are and to evaluate the
pros and cons of government regulation of the
pharmaceutical industry
• An understanding of the biopharmaceutical
industry requires us to study its market structure,
pricing policies, the effects of government
regulation, the effects of cost-containment
strategies of third party payers, and the role of
international competition
• We will also consider the effects of new drugs,
insurance coverage, and advertising on the
demand for prescription drugs
The Importance of Pharmaceuticals
• Even though pharmaceuticals still make up only
a small fraction of total healthcare expenditures,
the proportion devoted to these products has
been increasing rapidly in recent years
• Increases in expenditures are partly the result of
price increases and partly a result of increases
in quantity utilized
– The increase in quantity is a mixture of higher
utilization of existing drugs and the purchase
of new pharmaceuticals
Market Structure
• Effects of Firm Size on Research &
Development Productivity
– Larger firms which conduct more
research projects tended to also have
more productive research programs
• Larger firms were also found to be
more likely to undertake research that
integrates process and product
development
Government Regulation of the
Pharmaceutical Industry in the United
States
• Regulation by the Food and Drug Administration
– Federal regulation of the quality of drugs marketed in
the United States began with the enactment of the
Pure Food and Drug Act in 1906 that created the FDA
– The passage of the Kefauver-Harris Act[J1] in 1962
greatly strengthened the FDA
• The Kefauver-Harris Act[J2] required a more
stringent regime of clinical testing to launch both
NCEs and generic versions of drugs already on the
market. The number of new drugs launched per
year declined after 1962
• Smaller firms suffered a decline in both their
research productivity and market share
Government Regulation of the
Pharmaceutical Industry in the
United States
• In 1971, the government added a proof of efficacy to the
requirements for the introduction of new drugs
– Overall requirements became more stringent, and by
the 1990s the average time from first application to
the FDA approval of a drug had risen to over nine
years
• The following schedule shows the average time required
for the development of an NCE in the late 1980s:
– Discovery of an NCE
– Preclinical animal testing
– File application for authorization for human testing
(approximate time for discovery, preclinical and
application approval: 3.5 years)
Requirement for Prescriptions
(Rx)
• A second type of regulation intended to promote
the safety of the general public is the
requirement that a wide range of drugs be
available to consumers only when prescribed by
a licensed physician
• The argument that the requirement of
prescriptions from physicians is not in the public
interest is made more plausible when one
observes the many near-equivalents to newer
prescription drugs that are available without
prescription in the over-the-counter (OTC)
market
Demand for Pharmceuticals
• Effect of Increased Insurance Coverage for
Prescription Drugs
– Third party payment now routinely reimburses
a higher proportion of generic drug costs as
opposed to brand name drugs in an attempt
to make consumers and physicians more
cost-conscious
– Medicaid also reimburses only the price of the
generic drug when substitutes for brand name
drugs are available
• In this way, insurance companies can affect
the balance of generic and brand name
drugs utilized by altering relative prices to
consumers
Demand for Pharmceuticals
• Effect of Direct Marketing to Consumers
– Since 1997, direct marketing of drugs to
consumers has been legal in the United
States
• This makes it possible for drug companies
to create a consumer demand for products
that physicians might not otherwise
recommend
– Direct marketing to consumers also provides
a greater incentive to develop lifestyle
products, such as treatment for hair loss or
sexual dysfunction
Profitability of the U.S.
Pharmaceutical Industry
• Profits are often thought to be higher in the
pharmaceutical industry than in most other
industries in the United States
• Because the proportion of cost devoted to R&D and
the rate of technological change are substantially
higher in the pharmaceutical industry than in most
other industries, the return on equity tends to
exaggerate the profitability of pharmaceutical firms,
given the way R&D expenditures are treated on
corporate balance sheets
• Even in the case of drugs that receive FDA
approval, only a small proportion provide enough
revenue through sales to cover the R&D costs
incurred in their development
Summary
• At the end of the twentieth century, the United
States still led the world in the development of
new pharmaceuticals, although the costs of
developing new drugs had risen dramatically at
the same time that managed care imposed
downward pressure on the domestic prices of
new drugs
• The flow of new products continues to stimulate
demand for pharmaceuticals, as does the
increase in third party prescription drug
coverage