Teleconference2 Non-Profits and Hospital Behavior

Part 1: Review of Homework 1.What is the rational for employer-provided health insurance in the US? What are the benefits of such a system? What are the costs? Should employers be involved in providing health insurance for their workers? 2.What is the role of market power between hospitals, insurance companies and consumers in relation to healthcare costs? How does this relate to the policy ideas of insurance exchanges, accountable care organizations, and employers? How would an “all payer” system be beneficial? What are the downsides to this? Wall Street Journal –hospitals negotiating deals with insurance companies in the exchanges

Paper Discussion: Burns and Pauly, “Accountable Care Organizations May have Difficulty Avoiding the Failures of Integrated Delivery Networks of the 1990s” Altman, “The Lessons of Medicare’s Prospective Payment System Show that the bundled Payment Program Faces Challenges”

Hospitals and the Role of Nonprofit Firms Why is the not-for-profit Form Dominant? 1.Contract Failure Consumers may trust non-profit 2.Public Good Nature of Healthcare Nonrivalness Nonexcludability

The Role of Nonprofit Firms Why is the not-for-profit Form Dominant? What part of healthcare is public good? Services to the uninsured Excess capacity Patient educational and social services Care for particular diagnostic groups Teaching and research

The Role of Nonprofit Firms Why is the not-for-profit Form Dominant? 3.Cartel Theory Nonprofits are a form of market failure Nonprofits are dominant because this is in physicians’ collective interest. 4. Inertia “owners” of nonprofits are not well-defined Current stakeholders may have incentive to oppose conversions.

The Role of Nonprofit Firms What is the objective of nonprofit hospitals? 1.Altruistic models where hospitals “do the right thing” producing the result that maximizes social welfare. 2.Utility Maximizing models where the objective of the hospital is to maximize the utility of the decision makers (trustees, hospital administrators, employees). May lead to excess investment in capacity, quality, staff, etc. 3.Physician Control Model where the physicians act as the residual claimant of the hospital.

The Role of Nonprofit Firms How do private nonprofits differ from for- profit hospitals? Costs -- to the extent that the residual claimant is not well defined, we would expect nonprofits to be less efficient (in terms of cost). Yet, few differences are found Cost Shifting/price discrimination –but not much difference in pricing behavior between NFP and FP hospitals

The Role of Nonprofit Firms How do private nonprofits differ from for- profit hospitals? Uncompensated Care – again we might expect to see large differences, but not so much. And when consider tax revenue paid by for profits, things are “even more equal”. Quality – evidence is somewhat mixed, but no clear evidence of differences Entry and Exit – nonprofits are quicker to enter a market in response to demand growth and less likely to exit in demand reductions. Suggests nfp hospitals derive utility from greater quantity.

The Role of Nonprofit Firms How do private nonprofits differ from for- profit hospitals? Bottom line – one is struck by the similarity between not- for-profit and for-profit performance. Different objectives but constraints on both sides pushing them together.

Hospital Competition How do Hospitals Compete With Each Other? Consumer-Driven Competition Inelastic Demand, third-party payers (assume passive) Competing in price may not be too effective Non-price competition Physician referral, overall reputation. Hospitals may race to achieve the highest RELATIVE quality Medical Arms Race

Hospital Competition How do Hospitals Compete With Each Other? Implication of Medical Arms Race Competition is bad since it leads to excess investment and too much quality. More competition will result in higher prices and costs. Thus we should discourage competition among hospitals Certificate of Need Very Loose Merger Policy

Hospital Competition How do Hospitals Compete With Each Other? Payer-Driven Competition As manage care and other less passive insurance companies gained market power, and they were allowed to engage in selective contracting with hospitals, price once again became an important variable. Now hospitals were forced to compete in price to get the managed care contracts.

Hospital Competition Proton Beam Therapy – Medicare pays around 50k for treatment of prostate cancer, about twice as other types of radiation. But no evidence it is more effective. – Shown to be more effective in some rare pediatric cancers. But fewer than 3500 cases per year, can’t keep the 9 existing centers in use, and 20 more in planning or construction – Comparative effectiveness research and dynamic pricing

Hospitals and the Role of Nonprofit Firms How do Hospitals Compete With Each Other? Do we really need 3 children’s hospitals in San Antonio? Methodist Children’s CHRISTUS, Baylor College of Medicine, Texas Children’s Hospital Vanguard, CHOP, UTHSCSA The role of future risk sharing models of compensation may change the face of competition (ACOs, Bundled Payments, Selective Contracting)

Mergers and Anti-Trust – Mergers can increase efficiency Economies of scale. Economies of scope Improved Management. Acquiring a badly run firm and installing better management produces gains. Reduce the negative effects of nonprice competition. EMR and other technological Innovation has increased economics of scale, Likewise for the future of reiumbursement – Mergers can lower efficiency Market or Political Power. The main disadvantage of a horizontal merger is that the resulting firm would face less competition and acquire additional market power.

Mergers and Antitrust Kaiser Health News – “humongous monopoly” drives prices high Journal of Healthcare Management – hospitals need at least 160% of Medicare to survive!