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1) Why is Non-Profit Dominant? 2) What is their Objective? 3) Cost Shifting vs. Price Discrimination 4) How do Hospitals Compete? 5) Consolidation 6) Pricing 2

 Downward trend in the number of hospitals  Expected to continue as consolidation continues and care moves out of the hospital.  For-profit hospitals are on the rise, but Nonprofits are still a large majority, why? 3

 NFP do not distribute accounting profit to individual equity holders  Rather it goes as a dividend to its sponsors  NFP exempt from corporate income and property taxes  Better access to tax exempt bond financing  Eligibility for private donations  For-profits have access to tax exempt bonds and can raise equity capital through sale of stock 4

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 Contract failure  Asymmetric information  Shopping problem  Trust between patient and physician  Public goods  Inertia Many “nonprofits” make a large profit  Tax exempt vs. nontax exempt 6

 Most firms exist to maximize profits  But for a NFP, what is their objective?  “Profit” Maximization  No Margin, no mission?  Utility Maximization  Physician Control 7

 Costs and Pricing  Uncompensated Care 4.5% vs 4%  Quality  Entry and Exit  NFP quicker to enter a new market and slower to exit  Bottom Line: Very hard to “see” a difference 8

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 Price Discrimination – Selling different units of output at different prices based on the buyer’s willingness/ability to pay  Senior citizen discounts, hardback vs. paperback books, new car prices, hospital pricing  Cost Shifting – special case of price discrimination where the lower price from one group causes the firm to charge higher prices to another  Both require some degree of market power, but cost shifting implies more  Firm not maximizing profits to begin with  Payer is passive/powerless 11

 Hospital are victims of inadequate public spending  “hospitals shifting costs from Medicare to private payers and employers is seen as the number one reason for higher medical cost trends [of private insurers].” PwC  A dollar reduction in public payment will result in a dollar increase in private payment  2007 study estimates $88.8 Billion shifted to private insurers  $51.0 from hospitals (24.8 Medicare, 16.2 Medicaid)  37.8 from physicians (14.1 Medicare, 23.7 Medicaid)  Relying on the private sector to curb health care spending will be inadequate. 12

 Most economist don’t buy it  Thought experiment  Empirical support is limited  Some evidence prior to the 1990s  Much less evidence in recent research  Unless….  Hospital consolidation 13

 Normally competition leads to lower prices and decreased costs.  In hospitals it is often argued the opposite occurs.  Some research shows that when hospital markets become more competitive there is increased costs and higher prices to consumers  Policy implications are to discourage competition 14

 Medical Arms Race  “Consumer-Driven” Competition  Hospitals compete not in the price/quality space but in a “relative” competition  Physicians  Perceived quality relative to competitors  Incentive to over-invest in technology and expand into “unprofitable” services 15

 Policy Reaction to MAR  CON Laws  Hospitals must justify the need is there for a particular service or facility prior to adding it.  Non CON states such as Texas have seen some of the largest examples of this type of behavior  Anti-Trust Policy  Implication is that monopolies are not so bad  Mergers that would have been blocked in other industries have been allowed in hospitals 16

 Evidence on MAR  Research prior to the 1990s tends to find that when markets become more competitive, then there is an increase in costs and consumers face higher prices.  Contrary to standard economic theory  Research looking at data in the 1990s found the opposite:  More competitive markets resulted in lower prices and costs 17

 Payer Driven Competition  When hospitals compete for patients via insurance contracts, we find markets tend to work well.  In most markets the individual paying the bill and consuming the product are the same so this is not an issue  Selective contracting  By the end of the 1990s the Medical Arms Race was considered dead  But as consumers have demanded choice in providers, selective contracting has become much less selective  Robotic Surgery  Proton Beam Therapy  Children’s hospitals  Policy should be focused on getting providers to compete for contracts. 18

 Consolidation Trends in the 1990s 19

 Rise of Local Hospital Systems 20

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The Affordable Care Act represented a "tectonic shift" in the way hospitals do business and many are left with few choices but to be acquired or merge with another entity. 22

 Affiliation  Most flexible form of consolidation  Utilized to increase footprint, gain economy of scale, create referrals, etc.  Do not necessarily change management or governance  Joint Venture  Mildly flexible  Used to create something new that might be overwhelming to do solo  Shared governance  Some form of profit/risk sharing 23

 Joint Operating Agreement  Virtual mergers – assets may separate but services are coordinated  New overarching governance board, but hospitals maintain independent boards as well  May borrow for capital investments as one organization  Similar to JV but larger 24

 Merger  Mutual decision of two companies to combine  Leadership may be a combination of the two hospitals or from an outside source  Hospitals absorb each other’s assets and debts  Acquisition  Purchase of one hospital by another 25

 Horizontal Consolidation  Hospital to hospital  Vertical Consolidation  Hospital to physician practice  Hospital to long-term care  Hospital/physician group to payer 26

 Economies of Scale  As the size of the organization increases the average cost of producing the good declines  Specialization of labor  Efficient use of capital  Lower input prices for buying in bulk  HITECH  ICD-10 (18,000 to about 150,000 codes)  New forms of financing  Accountable Care, Bundled Payment and other forms of capitation  Consolidations lead to lower costs, benefit consumers 27

 “Hospitals with private rates below 160 percent of Medicare will have difficulty” Journal of Healthcare Management 28

 Bargaining power  If consolidation helps hospitals by allowing them to negotiate better rates from payers, then this is not good for the consumer.  From the hospital’s perspective it doesn’t matter if it is economies of scale or bargaining power, but from society’s perspective it matters 29

 Coordination  Essential for delivering high quality care  Breaking down the silos  Competition  Essential for innovation and driving higher value  There needs to be a balance  If coordination leads to integration that can reduce competition  Need to watch quality and quantity as well as price 30

 Hospital pricing has received much attention lately  Prices that private plans pay are opaque to both consumers and to payers  Details of contracts are kept secret  Complexity of medical care  Employers and employees pay the prices but are not aware of the contract details  Silos in health care 31

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 It is clear that high prices lie at the heart of the health spending problem in the US  We don’t fully understand why prices vary across services and across providers.  Research from the Center for Studying Health System Change, September 2013  Examined 13 metropolitan areas 34

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 High degree of variation in pricing both within and across markets  Larger for outpatient than inpatient  5 of the 13 markets are in Michigan which has an unusually concentrated insurance market  One insurer has 70% of market share  Yet even here there is large variation 37

 Reference Pricing  Payer sets a maximum amount for a specific procedure  Other “value based” insurance contracts  “Nudge” consumer to high value providers – similar to prescription drug formularies  Return to selective contracting  Regulation  All-Payer Model  Price Transparency 38

1) Dominance of Non-Profit – contract failure most logical, although less likely to apply today 2) Non-profits competing goals of profit and utility maximization 3) Cost Shifting and Price Discrimination are two different things 4) How hospitals compete makes a difference 5) Trend in consolidation is a two-edged sword 6) Pricing?? 39