Health Economics & Policy 3 rd Edition James W. Henderson Chapter 9 The Market for Hospital Services

Factors Transforming the Hospital Industry l Germ theory of disease l Advances in medical technology –Pharmaceuticals –Diagnostic imaging –Surgical practices l Increased urbanization and mobility

20 th Century Hospitals l : Flexner Report led to medical school /hospital affiliations l 1920s: Physician licensing and hospital privileges; role and trainings of nurses l 1930s: Health insurance beginnings; important drug discoveries l 1940s: IRS rulings that health benefits are tax deductible and tax exempt l 1950s: Advances in drugs and technology

20 th Century Hospitals 20 th Century Hospitals l 1960s: Medicare and Medicaid passed l 1970s: Explosive growth; development of expensive procedures and technology; double digit increases in HCE annually l 1980s: Hospital DRGs; HCE/GDP > 10% l 1990s: New forms of managed care to control costs

U.S. Institutional Setting l Hospital classification –Community hospitals –Teaching hospitals –Private for profit, private not-for-profit, public not-for-profit l Hospital spending l Hospital market structure

Community Hospital Characteristics,

Community Hospitals, by Ownership Type

The Role of Not-for-profits l Not-for-profit organizational form –Right to transfer assets –Capital funds from donations –Use of surplus funds restricted –Total liquidation transferred to trust l Nature of competition in the not-for-profit sector –Medical arms race –When you run out of money, you run out of options – maintain 3-5% margins

Pricing Practices in Medicine l Price discrimination l Cost shifting

Charges and discounts for diagnostic bilateral mammogram

Models of Hospital Behavior l Utility maximizing models l Physician-control models

The Trend Toward Multi- hospital Systems l The theory of consolidation –Reasons for consolidation l Empirical evidence