Kinh tế học - The hospital market - Part 2: Professor vivian ho health economics fall 2007

The Hospital Market, Part 2Professor Vivian HoHealth Economics Fall 20071Structure: Putting it all TogetherIs 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.2Filed October 17, 1995Mercy and Finley: only 2 acute care hospitals in Dubuque, Iowa propose to merge.Justice Department sues for preliminary injunction.3FactsDubuque population = 86,403Mercy: 320 staffed beds, average daily census = 127.Finley: 124 staffed beds, average daily census = 63.4 competition - outside 70m radius, but within 100 m.WaterlooDubuqueCedar RapidsIowa City, IowaMadison, WisconsinFreeport, Illinois5Insurance coverage for Mercy/Finley patients50% Medicare/Medicaid25% Fee-for-service (traditional indemnity)25% Managed care (HMOs, PPOs)Negotiated 15-30% hospital price discounts.6Justice Department case1) Where do Dubuque patients go for hospital care? 88% inside (Mercy or Finley) 12% outside2) Where are Mercy/Finley patients from? 76% inside (Dubuque) 24% outsideDubuque the relevant geographic market, and merger constitutes a monopoly.7RulingDistrict 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”8“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.9Case Study ConclusionEven if only one hospital exists in a given geographic region, it may not be able to act as a monopolistAbility of large, managed care buyers to shift patients can keep the market competitive.10Hospital Advertising% of hospitals that advertise rose from 36% in 1995 to 50% in 1998.We often see ads for local hospitals in newspapers and magazines.Why?11Dorfman-Steiner model of advertisingThe profit-maximizing amount of advertising occurs where:If Ea equals .2, then 1% ↑ in advertising → .2% ↑ in demand.And if EP equals 4, then Ea / EP 0.05To max profits, hospital should spend 5% of total revenues on advertising.12Hospital will spend more on advertising when:Ea is higher.EP is lower.↑ advertising costs $.  But when demand is less elastic with respect to price, these costs can be passed onto the consumer.Hospitals with greater market power will advertise more aggressively.13What type of advertising will hospitals use?Advertising the availability of services that all hospitals have may ↑market size, but not your own patient base.Hospitals will use advertising to differentiate their product.Hospital rankings.Luxury services.14Hospital ConductLarge #s of sellers and low barriers to entry promote competition.We expect increased competition to lead to:Higher output and quality.Lower price.15However, the hospital market has important differences.Hospitals don’t necessarily maximize profits.Government is a major payerPrices not set competitively.Consumer less likely to shop around.Insurance and asymmetric info.Is hospital market competition good or bad for consumers? 16Markets with fewer hospitals may face higher prices.But hospitals in more concentrated markets may be larger, and econ of scale may ¯ costs.Look at price and quality effects of hospital mergers.17Data from Los Angeles in 1990-1993 suggests that hospital mergers would ↑ prices >5%.  (Town & Vistnes 2001)Hospitals that merged between 1989 and 1996 lowered their costs two years after consolidation relative to comparable hospitals that didn’t merge (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.18Other studies suggest that hospital consolidation does not improve the quality of care.These results suggest that more competitive hospital markets favor consumers.19Does Ownership Type Affect Conduct?Empirical EvidencePrices higher for for-profit hospitals, but NFP & public hospitals enjoy tax advantages, municipal bond discounts.Only small differences in costs by ownership type.20But public hospitals provide more uncompensated careData from CA calls into question tax-exempt status of NFPs.21Has managed care changed conduct?Empirical EvidenceHMO hospitalization rates 15-20% lower than those of fee-for-service insurance plans.However, HMO growth has not led to decrease in total hospital costs per capita at market level.22Maybe further HMO penetration required.Government still a dominant payer, and reimburses generously.Maybe managed care doesn’t work.Outcomes for patients covered by HMOs similar & sometimes better than those for fee-for-service patients.23Hospital Market PerformanceHow have price and quantity changed?24Source: U.S. Department of Labor, Bureau of Labor Statistics, CPI Detailed Report (various issues).25Hospital inflation rate exceeds general rate for all but 1 year.Despite move to prospective reimbursement by Medicare in 1983, hospital inflation continued.Possible explanations 1) generous insurance 2) fee-for-service medicine 3) lack of profit motive 4) quality competition26What about Quantity?Source: American Hospital Association, Hospital Statistics. Average length of stay declined, and admissions and occupancy rates declined through the 1990’s.2. But staffing, outpatient visits rose.Community Hospital Inputs and Utilization Trends in the United States, 1975-2005YearHospital Staffing RatioOccupancy Rate (%)Admission Rate (per 100 population)Average Length of Stay (days)Outpatient Visits (per 100 population)19753.0074.915.57.788.319803.3575.615.97.689.019853.8664.814.07.191.719904.2166.812.57.2120.619954.5962.811.86.5157.720004.6163.811.75.8185.22006xxx68.911.75.5200.227Was growth in staffing, outpatient visits inappropriate?Ratings of inappropriate use of 3 medical treatments among 1981 Medicare population, as defined by expert panel of MDs.Procedure Inappropriate use(%)coronary angiography 17%carotid endarterectomy 32%upper GI tract endoscopy 17%28Similar findings in 1979-1982 for coronary artery bypass graft patients.More recent studies find less inappropriate use in New York.However, practice variation studies show many surgical procedures performed less often relative to other areas in U.S.29Source: Marc L. Berk and Alan C. Monheit, “The Concentration of Health Expenditures: An Update,” Health Affairs 20 (Spring 2001), Exhibit 1.30Distribution of health expenditures has become more concentrated.Most severely ill patients receiving high-cost critical care in hospitals.1/7 of all health expenditures spent on those in last 6 months of life.Do we need to ration health care costs for the very ill?31