Kinh tế học - Health economics fall 2009

Medical Care Production and Costs Health EconomicsFall 2009Professor Vivian HoOutlineMotivationProductivity MeasuresCost MeasuresMergers are transforming the industry 2000 – NE Georgia Health system proposed to buy Lanier Park Hospital in Gainesville estimated cost savings of $2 million annually.would lead to $100 million cut in operating costs in first year alone. 2005 – United Health Group (insurance) proposed to merge with PacifiCare Health Systems (also an insurer) 26 million customers.Mergers are transforming the industry (cont.) But will mergers help to contain costs and/or improve productivity in the industry?Depends upon production and costs in the health care sector.Assessing the Productivity of Medical Firms Economists often describe production of output as a function of labor and capital :q = f(n,k)In the case of health care : q = hospital services n = nurses k = medical equipment, hospital buildingAssessing the Productivity of Medical Firms (cont.) Short run : k is fixed, while n is variablea) At low level of n, k is abundant. Each in nurses when combined with capital greater in services. - potential synergy effect because nurses can work in teams.b) Further in nurses service, but a decreasing rate - law of diminishing marginal productivity. c) “Too many “ nurses can cause congestion, com- munication problems, hospital servicesSubstitutability in Production of Medical CareThere may be more than one way to produce a given level of health care.Licenced practical nurses (LPNs) vs Registered Nurses (RNs) in hospitals.LPNs have less training. Maybe not as productive, but not as costly. Physician assistants vs physicians at ambulatory clinics.But physician assistants can’t prescribe meds in most states. Substitutability in Production of Medical Care (cont.) r = 0 no substitutability. r = perfect substitutability.8Potential for substitutability If price of 1 input increases, can minimize impact on total costs by substituting away.Elasticity of substitution :r = [D(I1/I2)/I1/I2] : [D(MP2/MP1)/MP2/MP1]% change in input ratio, divided by % change in ratio of inputs’ MPs.Production Function for Hospital Admissions Jensen and Morrisey (1986) Sample : 3,450 non-teaching hospitals in 1983.q = hospital admissionsinputs : physicians, nurses, other staff, hospital beds.q = a0 + a1physicians + a2nurses + . + e Coefficients in regression are MPs.Results Each additional physician generated 6.05 more admits per year. Nurses by far the most productiveAnnual Marginal Products for AdmissionsPhysicians 6.05Nurses 20.30Other Staff 6.97Beds 3.04Input MP (at the means)Results (cont.) Each inputs is a substitute for other in production process.If wages of nurses rise, can substitute away by having more hospital beds.Elasticity of Substitution between InputsPhysicians with nurses 0.547Physicians with beds 0.175Nurses with beds 0.124Input pair s Except for when s = 0Medical Care Cost Explicit costs of doing business. e.g. staff payroll, utility bills, medical supply costs. Necessary for : Comparing performance evaluation across providers/depts. Taxes Government reimbursement/rate settingAccounting CostsMedical Care Cost (cost.) i.e. opportunity costs. e.g. opportunity cost of a facility being used as an outpatient clinic = rent it could earn otherwise. Necessary for :optimal business planning.allows one to consider highest returns to assets anywhere, not just vs. direct competitors, or w/in health care industry.Economic Costs = Accounting CostsShort-Run Total Cost cost hospital serviceSTC( q ) = w n + r k*w = wage rate for nurses r = rental price of capitalshort run k fixed w n = variable cost r k = fixed cost . q0STCSTCw nr kShort-Run Total Cost (cont.)STC( q ) = w n + r k* In the short run, k is fixed. rk* is the same, regardless of the amount of hospital services (q) produced.As q rises, increases in STC are only due to increases in the number of nurses needed (n).Marginal and Average CostsSMC = STCq= (wn + rk*)/q= w(n/q) = w(1/MPn)= w/MPnThe short run marginal cost of nurses depends on their marginal productivity.Marginal and Average Costs (cont).SAVC = STVCq= (wn)/q= w(1/APn)= w/APnThe short run average variable cost of nurses depends on their average productivity.Graphing Marginal and Average CostsCostsq0q0SMCSATCSAVCSAVC0SATC0SMC0Graphing Marginal and Average CostsSATC and SAVC are u-shaped curves.Increasing returns to scale followed by decreasing returns to scale.SMC passes through the minimum of both SATC and SAVC.If marginal cost is greater than average cost, then the cost of one additional unit of output must cause the average to rise. Average and Marginal Costs (cont.) IRTS followed by DRTS in production leads to U shaped AC curve. Hospital doesn’t necessarily produce at q* (min. cost). Depends on hospital’s objectives. Even so, will attempt to stay on the cost curve (not above it).Average and Marginal Costs (cont.)Why do all of these cost curves matter?Many hospitals operate at a loss (profitsCBAP, the hospital will lose less if it remains open. Price per PatientPatients0MCATCAVCBACPq*DEIn the SR, FC are critical for determining whether a hospital should stay open for business.So, in general, how large are FC?Study of Cook County Hospital in Chicago (Roberts, JAMA 1999)Urban public teaching hospital, 1993Fixed Costs:CapitalWorker salaries & benefitsBuilding maintenanceUtilitiesVariable Costs:Worker supplies (e.g. gloves)Patient care suppliesPaperFoodLab suppliesMedicationsWhy are salary & benefits a FC?Workers often have long-term contracts. Many workers won’t take jobs w/ frequent layoffs. For Cook, the budget was 84% FC, 16% VC. Often makes sense for Cook to operate at a loss, not reduce patient load. Cutting the # of patients you serve won’t save a lot if you can’t cut FC simultaneously. If you serve 5% fewer patients, you may still need to:Pay for a CT scanner & technicianPay for upkeep of the ER & ORPay annual licensing fees to city & stateDeterminants of Short-run Costs (cont.) 5 different measures of q inputsER care nursing labormedical/surgical care auxiliary laborpediatric care professional labormaternity care administrative laborother inpatient care general labor materials and suppliesCowing and Holtmann 1983FindingsFound short run economies of scaleHospitals operate to left of min. on AVC curve. i.e Larger hospitals producing at lower costs than smaller hospitals. Best way to reduce aggregate hospital costs?Reduce # of hospital beds by a fixed % in all hospitals.Close the smallest hospitals in each region.Findings (cont.)Definition : Economies of scopeCost of producing 2 outputs < sum of cost of producing 2 goods separately. Found Diseconomies of scope with respect to ER and other services.Larger ER’s may bring in more complex mix of patients to the hospital. ORLarger ER’s generate operating challenges for other services (e.g. communication, staffing scheduling).Sources of Economies of Scope Economies of scope can arise at any point in the production process.Acquisition and use of raw materialsDistributionMarketingSources of Economies of ScopeSpecialty Hospitals versus General Hospitals.Specialty HospitalsTexas Heart Institute in Houston.Shouldice Hospital in Ontario performs only hernia repair.University General Hospital in Houston, bariatric surgery.General HospitalsMethodist, St. Luke’s, Memorial HermannSources of Economies of ScopeGeneral hospitals can spread the fixed costs of operating rooms and intensive care units over multiple different operations.Operate at full capacity by treating all types of patients.However, specialty hospitals argue that they can lower marginal costs by specializing.Sources of Economies of ScopeKnow-how can be spread over products sharing similar technology.Medical device companies frequently produce multiple different products.Ethicon Endo-Surgery.Makes multiple different devices for minimally invasive surgery. Factories often require similar technology, and the marketing strategies are similar too.Sources of Economies of ScopeSpreading advertising costs.Methodist hospital can pay for one ad advertising its top rankings in multiple services.Sources of Economies of ScopeResearch and development.Pharmaceutical companies can spend hundreds of millions of $’s to develop a drug.Once drug is developed, they sometimes find alternative beneficial applications.Gleevec for leukemia, and gastrointestinal tumors.Costs of production and sales can be spread over many different drugs. Long Run Costs of ProductionIn the long run, all inputs are variable. k is no longer fixed. e.g. A hospital can build a new facility or add extra floors to increase bedsize in the long run.If all inputs are variable, what does the long run average cost curve look like?The Long Run Average Cost CurveAverage Cost of Hospital Services# of patientsLATCq0q1q2Long Run Costs of ProductionJust like the short run cost curve, the long run cost curve for a firm is also u-shaped.However, the short run cost curve is due to IRTS, then DRTS relative to a fixed input.e.g. In the short run, the only way to increase the number of patients treated was to hire more nurses; but the # of beds (k) was fixed.But in the long run, there are no fixed inputs.Long Run Costs of ProductionThe u-shaped long run average cost curve is due to economies of scale and diseconomies of scale.Economies of scale Average cost per unit of output falls as the firm increases output.Due to specialization of labor and capital.Long Run Costs of ProductionExample of specialization and the resulting economies of scale.A large hospital can purchase a sophisticated computer system to manage its inpatient pharmaceutical needs.Although the total cost of this system is more than a small hospital could afford, these costs can be spread over a larger number of patients.The average cost per patient of dispensing drugs can be lower for the larger facility.Long Run Costs of ProductionIncreasing returns to scaleAn increase in all inputs results in a more than proportionate increase in output.e.g. If a hospital doubles its number of nurses and beds, it may be able to triple the number of patients it cares for.However, most economists believe that economies of scale are exhausted, and diseconomies of scale set in at some point.Long Run Costs of ProductionDiseconomies of scale arise when a firm becomes too large.e.g. bureaucratic red tape, or breakdown in communication flows.At this point, the average cost per unit of output rises, and the LATC takes on an upward slope.Diseconomies of scale (in costs) imply decreasing returns to scale in production.The Long Run Average Cost CurveAverage Cost of Hospital Services# of patientsLATCq0q1q2Economies of scaleDiseconomies of scaleLong Run Costs of ProductionDecreasing returns to scaleAn increase in all inputs results in a less than proportionate increase in output.e.g. Doubling the number of patients cared for in a hospital may require 3 times as many beds and nurses.In some cases, the production process exhibits constant returns to scale.A doubling of inputs results in a doubling of output.The Long Run Average Cost Curve under Constant Returns to ScaleAverage Cost of Hospital Services# of patientsLong Run Costs of ProductionLike the short run cost curve, a number of factors can cause the short run cost curve to shift up or down.Input prices.Quality.Patient casemix.e.g. If the hourly wage of nurses increases, the average cost of caring for each patient will also rise.The average cost curve will shift _____Long Run Costs of ProductionEmpirical evidence on HMOs and costs.See handout.