Lecture Health economics - Chapter 10: The hospital market (Part 2)

This chapter presents the following content: Structure - Putting it all together, case study conclusion, dorfman-steiner model of advertising, what type of advertising will hospitals use? Hospital conduct, does ownership type affect conduct?...

The Hospital Market, Part 2

Professor Vivian Ho

Health Economics

Fall 2007

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

Mercy and Finley: only 2 acute care

hospitals in Dubuque, Iowa propose to merge

Justice Department sues for preliminary injunction

FactsDubuque 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.

Waterloo

Dubuque Cedar Rapids

Iowa City, Iowa

Madison, Wisconsin

Freeport, Illinois

Insurance coverage for Mercy/Finley patients

 25% Fee-for-service (traditional indemnity)

Negotiated 15-30% hospital price discounts.

Justice Department case

1) Where do Dubuque patients go for

 Dubuque the relevant geographic market, and merger constitutes a monopoly.

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

Even if only one hospital exists in a

given geographic region, it may not be able to act as a monopolist

Ability of large, managed care buyers to shift patients can keep the market

competitive

Dorfman-Steiner model of advertising

The 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 0.05

 To max profits, hospital should spend 5% of total revenues on advertising.

Demand  

of   Elasticity  

Price          

       Revenues

  Total

Demand  

of   Elasticity  

g Advertisin es

Expenditur  

g Advertisin

Hospital 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.

What 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.

However, the hospital market has

important differences

 Hospitals don’t necessarily maximize

profits.

 Government is a major payer

Prices not set competitively.

 Consumer less likely to shop around.

Insurance and asymmetric info.

• Is hospital market competition good or bad for consumers?

Markets 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

Data 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.

Other studies suggest that hospital consolidation does not improve the quality of care.

These results suggest that more

competitive hospital markets favor consumers

Does Ownership Type Affect

Conduct?

Empirical Evidence

 Prices higher for for-profit hospitals, but NFP & public hospitals enjoy tax

advantages, municipal bond discounts.

 Only small differences in costs by

ownership type.

But public hospitals provide more uncompensated care Data from CA calls into question tax-exempt status of NFPs.

Has managed care changed

 However, HMO growth has not led to

decrease in total hospital costs per capita

at market level.

 Maybe further HMO penetration required.

 Government still a dominant payer, and reimburses generously.

Outcomes for patients covered by

HMOs similar & sometimes better than those for fee-for-service patients

Hospital Market Performance

How have price and quantity changed?

Year

Total Hospital Expenditures (billions of dollars)

Average Annual Change from Previous Period

Spending as a Percentage of Gross Domestic

Source: U.S Department of Labor, Bureau of Labor Statistics, CPI Detailed

Report (various issues).

Table 14-8 Hospital Price Inflation Trend in the United States 1975-2006

Hospital inflation rate exceeds general rate for all but 1 year.

Despite move to prospective

reimbursement by Medicare in 1983, hospital inflation continued

What about Quantity?

Source: American Hospital Association, Hospital Statistics

1 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

Admission Rate (per 100 population)

Average Length of Stay (days)

Outpatient Visits (per 100 population)

Was growth in staffing, outpatient

visits inappropriate?

Ratings of inappropriate use of 3

medical treatments among 1981

Medicare population, as defined by

Similar 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.

Source: Marc L Berk and Alan C Monheit, “The Concentration of Health

Expenditures: An Update,” Health Affairs 20 (Spring 2001), Exhibit 1.

Table 14­10  Concentration of Health Expenditures by 

Distribution of health expenditures has become more concentrated.

Most severely ill patients receiving cost critical care in hospitals

high-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?