Transcript Health Economics ch6

Hospital Market
Outline
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Why are nonprofits in hospital market?
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How do hospitals compete?
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What is hospitals’ objective function?
Background
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High share of total health spending led to hospitals as target for
cost containment
Hospitals very labor-intensive (54%)
Multiple payment sources
Characteristics of Hospitals
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Vast majority are private not-for-profit (NFP)
Who are the residual claimants?
Tripartite structure of hospital management
For-profit Organization
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supervised by the board elected by shareholders
the ability to raise capital through equity and bond markets
the ability to separate ownership from control
limited liability to shareholders
Nonprofit Organization
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Nonprofits not owned by shareholders
Nonprofits do not have a governing broad elected by
shareholders
Nonprofits cannot participate in equity funding arrangements
Nonprofits can accept charitable gifts
Nonprofits may enjoy the tax exemptions
Stylized Facts on Nonprofit Organization
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operate in service sector, but no in manufacturing one
operate locally, not nationally
have a higher quality of product than for-profit firms, when they
compete
Have a self-perpetuating board of trustees
are supported by, but not rely on tax exemptions
rely on gifts or bonds for financing
have a church related history
rely on gifts of money or time or both for their operations
Impact of Ownership Status on Health Care
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Non-for-profit (NFP) organizations concentrate in the area of
education, health care, and the arts.
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Hospital facilities: U. S. (60% ), France (16%), Germany (33%)
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NFPs do not distribute profits to individual equity holders (NonDistribution Constraint) .
NFPs enjoy some advantages including tax exemption (corporate
income and property taxes), better access to tax-exempt bond
financing, and eligibility for private donations.
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)
Ownership Types in Taiwan
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Public: managed by the government or public enterprises or
universities
Private NFP: private universities or donations for purposes of
charity or medical research
Private FP: physicians
Table 1 : Distinctions between FP and NFP Hospitals in Taiwan
For-profit Hospitals
Nonprofit Hospitals
Owners of Hospitals
Physicians under relevant medical
regulations
Juridical persons making a certain
amount of donation
Right of Surplus
Distribution
Can distribute some proportion of profits
Cannot distribute surplus
Tax Treatment
Owners of hospitals have to pay personal Before 1995, nonprofits were
income tax from earnings
exempted from corporate tax. Since
Not exempted from land and property tax. 1995, corporate income tax is not
exempted if less than 80% of
earning are not well spent.
Land and property tax are exempted.
Sources of Capital
1. Equity capital from establishers
2. Debt
3. Retained earnings
1. Charitable contributions
2. Debt
3. Retained earnings
Composition of
Revenue
Sale of labor and services
Sale of labor and services
Charitable contributions
Table 2: Number of Hospitals and Beds by Ownership Between 1996 and 2002
Number of Acute-Care Hospitals
Year
Government
Non-profits
For-profits
Total
1996
94
73
454
621
1998
97
74
423
594
2000
98
79
407
584
2002
95
82
370
547
Number of Beds in Acute-Care Hospitals
Year
Government
Non-profits
For-profits
Total
1996
32,273
30,641
29,106
94,016
1998
36,807
32,995
30,116
101,916
2000
38,592
36,892
32,171
109,655
2002
41,646
40,058
33,512
117,218
Concerns of Critics of Hospital
Ownership Conversions
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Are the charitable assets properly valued or are
they being sold too cheaply?
Will the transaction be subject to independent
review?
Is the community at risk of losing valuable
health care services?
Will the new entity continue to provide
uncompensated care?
Will the proceeds of the sale be used to
promote the original NFP mission (which
federal tax laws requires)?
Theoretical Models of NFP Ownership
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Quality is uncertain or not contractible
 Arrow (1963): NFP exists because of the uncertainty of
identifying quality of care.
 Hart et al. (1997) and Glaeser and Shleifer (2001): “incomplete
contract theory.
Different objectives:
 Newhouse (1970): maximize quality/quantity/prestige instead
of profits or revenues
Bypass the monopoly profits
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Non-for-profit firms arise and supported by potential customers
through gifts of time and efforts in order to bypass natural
monopolies arising from the scale of economy that the community
would otherwise confront.
Theoretical Predictions of NFP
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Quality is uncertain or not contractible
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Different objective
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NFP provides better quality of care
NFP incurs higher expenditures
NFP provides better quality of care
NFP incurs higher expenditure
Local public good
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NFP provides more uncompensated care
Findings from Previous Empirical Studies (I)
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Most empirical studies are based on U. S. data
Expenditure
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Quality
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No difference: Institute of Medicine (1986), Becker and Sloan (1985)
FPs are higher: Sloan et al. (2001), Granneman et al. (1986), Silverman
et al. (1999)
No difference: Keeler et al. (1992), Sloan et al. (2001), Ettner (2001)
NFPs are better: McClellan and Staiger (2000), Shen (2002), Picone et
al. (2002)
Results from U. S. data are mixed and often complicated by the
complex setting of health system in U. S.
Study by Sloan et al. “Is there a Dime’s
Worth of Difference?
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Study Goals
◦ Re-ask old question: How do for-profit hospitals
compare on cost and quality?
◦ Use much longer cost and outcome streams which
allow us to examine patient “steering” post discharge
◦ Have several alternative indicators of outcomes—
survival, changes in functional and cognitive status, and
in living arrangements (admission to a nursing home)
◦ Not a hospital ownership conversion study
Why Payments Might be Higher For
Patients Admitted to FP Hospitals
Upcoding of DRG
 Physician fees may be higher
 More referrals to SNFs, home health agencies
owned by firm
 Not due to more lab tests, etc.
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Study by Sloan et al. “Is there a
Dime’s Worth of Difference?
Conclusion
Adjusting for endogeneity, FPs more expensive
to U.S. Medicare, especially for downstream
payments
 Did not find differences in outcomes suggesting
that quality comparable between FPs and the
other ownership types
 Should we be bothered by the added expense
to Medicare from the FPs?
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Results
•
Medicare Payments
◦ Both total payments for 6 months and payments less
payments for index admission (“downstream payments”)
were lower if patient admitted to NFP or G hospital than if
admitted to a FP hospital.
◦ Differentials ranged from 8-11% for G and 5-6% for NFP
(see Table 5)
◦ Differentials larger for downstream payments than for total
payments
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Mortality
◦ None of the ownership variables were
statistically significant at even the 10% level
◦ Effect sizes very small
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Regulation and Competition
Among Hospitals
Trends of # of Hospitals and Beds
Trends of # of Hospitals (by accreditation)
Trends of # of Hospitals (by accreditation)
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From 1995 to 2013，the number of beds increases from 90000
to 145000，but the number of hospital decreases from 787 to
474. Obviously, there is a trend of bigger hospitals.
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Among hospitals, the number of community hospitals drops
from 568 to 370, approximately 35% closed within 20 years.
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On the contrary, major hospitals rises from 13 to 22, and minor
teaching hospitals rises from 48 to 82.
# of beds (by accreditation)
Bed occupancy rate (by accreditation)
Structure: Putting it all Together
Is the hospital market competitive, or not?
Case Study:
UNITED STATES OF AMERICA, Plaintiff,
vs. MERCY HEALTH SERVICES and
FINLEY TRI-STATES HEALTH GROUP,
INC. Defendants.
Filed October 17, 1995
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Mercy and Finley: only 2 acute care
hospitals in Dubuque, Iowa propose to
merge.
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Justice Department sues for preliminary
injunction.
Facts
Dubuque population = 86,403
Mercy: 320 staffed beds, average daily
census = 127.
Finley: 124 staffed beds, average daily
census = 63.
competition - outside 70m radius, but
within 100 m.
Madison, Wisconsin
Waterloo
Cedar Rapids
Iowa City, Iowa
Dubuque
Freeport, Illinois
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Insurance coverage for Mercy/Finley
patients
 50%
Medicare/Medicaid
 25%
Fee-for-service (traditional indemnity)
 25%
Managed care (HMOs, PPOs)
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Negotiated 15-30% hospital price discounts.
Justice Department case
1) Where do Dubuque patients go for
hospital care?
88% inside (Mercy or Finley)
12% outside
2) Where are Mercy/Finley patients from?
76% inside (Dubuque)
24% outside
 Dubuque
the relevant geographic market,
and merger constitutes a monopoly.
Ruling
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District court judge rejects Justice
Department’s definition of geographic
market as too narrow.
 “The
government continues to fail to look at
the merger within the context of current
market trends. All evidence is that there is
a great deal of competition for health care
dollars…”
 “…if
DRHS [merged entity] reacted in a
noncompetitive manner, an HMO that
could successfully induce Dubuque area
residents to use alternative hospitals would
be at a significant cost advantage.”
 “There
is also evidence that managed care
entities can successfully induce Dubuque
residents to use other regional hospitals for
their inpatient needs.”
Merger of Mercy and Finley would
not/could not result in higher prices.
Case Study Conclusion
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Even if only one hospital exists in a
given geographic region, it may not be
able to act as a monopolist
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Ability of large, managed care buyers to
shift patients can keep the market
competitive.
Hospital Conduct
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Large #s of sellers and low barriers to
entry promote competition.
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We expect increased competition to
lead to:
 Higher
output and quality.
 Lower price.
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However, the hospital market has
important differences.
 Hospitals
don’t necessarily maximize
profits.
 Government is a major payer
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Prices not set competitively.
 Consumer
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less likely to shop around.
Insurance and asymmetric info.
• Is hospital market competition good or
bad for consumers?
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Markets with fewer hospitals may face
higher prices.
 But
hospitals in more concentrated
markets may be larger, and econ of scale
may reduce costs.
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Look at price and quality effects of
hospital mergers.
MAR Worse When There are More
Hospitals
More hospitals in market more competition
among hospitals for doctors (and their
patients) more Medical Arm Race
 Cost and quality much higher than is socially
optimal
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Regulatory (Government)
Responses
Entry regulation: certificate of need (CON)
 Revenue or price regulation: Nixon price
controls, state rate setting programs
 Utilization review: Professional Standards
Review Organizations Peer Review
Organizations for Medicare
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Herfindahl- Hirschman Index (HHI)
• Keeler and coauthors measured competition within a local
market in this study and many others measured by the
Herfindahl-Hirschman Index (HHI)
(6.5)
• Si = fraction of total hospital discharges in the market that
hospital i has
• In other studies, output has been defined as patient days
rather than discharges
• If the hospital is a monopolist (has all discharges in the market)
HHI is 1
• If there are four hospitals with unequal number of discharges,
the HHI is
0.152 + 0.352 + 0.272 + 0.232 = 0.27
• As the number of hospitals in a market rises, the HHI
approaches 0 in value
• The key assumption underlying the use of the HHI as a
measure of competition is that sellers find it easier to collude
in price-setting when the HHI is higher.
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Data from Los Angeles in 1990-1993
suggests that hospital mergers would ↑ prices
>5%.
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Hospitals that merged between 1989 and
1996 lowered their costs two years after
consolidation relative to comparable hospitals
that didn’t merge
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(Town & Vistnes 2001)
(Dranove & Lindrooth 2003)
Even if hospitals lower costs, they may not
pass price savings on to consumers.
 Hospitals
that merged in 1997-2001 raised their
negotiated PPO prices relative to the median
market price.
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Other studies suggest that hospital
consolidation does not improve the
quality of care.
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These results suggest that more
competitive hospital markets favor
consumers.
How do hospitals compete?
The Profit-Maximizing
Hospital
The Base Case
Profit Maximization When Only Quantity
of Service is Only Decision Variable
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Assume hospital faces a downward sloping
demand curve
◦ P=p(x) inverse demand curve
◦ Let profit be π
 Then π = p(x)x - C(x)
Where C(x)= total cost of production
output at quantity x
◦ dC/dx is the first derivative of total cost
with respect to x
Profit Maximization When Only Quantity
of Service is Only Decision Variable
Continued
dC/dx is the firm’s marginal cost
 P(x)x = Total revenue R(x)
 dR/dx = dp/dxx+p(x) = Marginal revenue
 Profit is maximized at
 dπ/dx = dp/dxx+p(x)-dC/dx = 0

AC
MC
p
MC
p
p*
AC
p*
D
MR
x*
D
MR
x
x*
Profit (or “Cash Flow”)Maximization:
Positive and Zero Profit Cases
x
Profit Maximization When Only Quantity
of Service is Only Decision Variable
Continued
Quantity is set at the quantity at which marginal
revenue equals marginal cost. Once optimal quantity
x* has been determined, optimal price p* is read from
the demand curve.
The optimal values are shown graphically in Chapter 5,
Fig. 5.5, Panel A.
AC
MC
p
MC
p
p*
AC
p*
D
MR
x*
D
MR
x
x*
Profit (or “Cash Flow”)Maximization:
Positive and Zero Profit Cases
x
Newhouse Model
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Explains how hospitals behave when they have an
objective other than profit maximization
See introduction of paper for characteristics of hospital
author trying to explain, at least as of 1960s
Hospital maximizes utility subject to a constraint
Derive constraint and then introduce hospital utility
function
Fig. 6.1. Hospital Demand and Cost
Curves for Hospitals with High (H)
and Low (L) Quality
Fig. 6.2. Hospital Demand and Cost
Curves for Hospitals with High (H),
Low (L), and Very High (HH) Quality
Fig. 6.3. Hospital Quantity-Quality
Frontier
Introduce Hospital Utility Function
Fig. 6.4. The Hospital’s Optimum
Quantity and Quality
How quality is measured
More $=More quality???
 Perhaps higher ratio of staff to patients (average
daily census)
 Perhaps more and more technologically
sophisticated equipment
 Sophisticated services, such as open heart
surgery program, high level trauma unit,
treatment unit for rare cancers, neonatal
intensive care unit
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Other Metrics for Hospital Quality
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Nurse staffing (to average daily census)
Facilities and services offered
Hospitals’ credentials (certifications, affiliations)
Patient outcomes: mortality rates (at discharge, at
30 days following admission, at 1 year following
admission, etc.)
Patient outcomes: rehospitalization rates
Patient outcomes: change in functional status, in
cognitive status
Process of care (chart reviews)