1. 317_L30, Mar 28, 2008, J. Schaafsma 1 Review of the Last Lecture Are discussing three generations of models of the practitioner firm have finished our discussion of the first two generations of models. discussed their efficiency implications and the associated ploicy implications big drawback of both generations of models: exogenous demand (ignores information asymmetry and the influence of supply on demand) Today look at the third generation of models of the P-F, and their efficiency implications and thus their policy implications Then begin our discussion of hospitals as firms

2. 317_L30, Mar 28, 2008, J. Schaafsma 2 Third Generation Models of the P-F: Endogenous Demand 3 rd generation models assume monopoly power, utility maximization, and endogenous demand these models similar to the 2 nd generation models but also include endogenous demand these models are quite complex; won’t discuss them in any detail However, this set of models needs to replace the demand curve with another constraint or else there is no limit on price that can be charged for any output level. i.e., no upper limit on net income!!! will look at three different suggested constraints ///

3. 317_L30, Mar 28, 2008, J. Schaafsma 3 Constraints on Supply Induced Demand: 1)Professional Ethics professional ethics  abide by the generally accepted guidelines for good medical care to promote demand outside these guidelines is distasteful  yields negative utility directly and positive utility indirectly (higher income) with modest demand inducement  net effect on utility may be positive with aggressive demand inducement  net effect on utility may be negative ///

4. 317_L30, Mar 28, 2008, J. Schaafsma 4 Problems with Ethics as a Constraint on SID good practice ethics appear to be endogenous to the healthcare system (how HC delivery is organized and paid for), i.e., concept of “good care” appears to vary: e.g., salaried vs. fee-for service Drs.  the former spend less time with their patients if good practice ethics depend on the supply side they are not really a constraint on supply side behaviuor but confirm to what suits suppliers recall wide regional variation in HC utilization rates yet same HS as education appears to eliminate some HC procedures e.g. tonsillectomies, overall level of activity not  => appears resources shifted to other procedures (possible reasons: non-price rationing of excess demand? SID?)///

5. 317_L30, Mar 28, 2008, J. Schaafsma 5 Constraints on Supply Induced Demand: 2) Relative Target Income here Drs. want to earn a level of income expressed as some multiple of average income for all wage earners (or relative to average income for some other profession) if they induce demand beyond this point  fear social backlash and government intervention problem with this constraint  determines income but not the workload. Why don’t Drs generate this income at a smaller workload by charging higher fees? usual answer  Drs pick a normal workload, then induce demand that will allow them to charge fees that generate their income target. ultimately  Drs need to justify income earned for hrs worked. ///

6. 317_L30, Mar 28, 2008, J. Schaafsma 6 Constraints on Supply Induced Demand: 3) Loss of Patients initially a patient may not be aware of SID however, as a result of comparisons with the experience of relatives and friends  patient may sense s/he is being over-serviced will put up with some over-servicing since finding another Dr involves search costs and uncertainty  switches if Dr over-services so aggressively that the cost of search is less than being over-serviced. problem with this constraint  norm against which a Dr is measured is the group average this average could be subject to professional drift (as DOC/POP ratio  ) ///

7. 317_L30, Mar 28, 2008, J. Schaafsma 7 Implications if the P-F is a Utility Maximizer and Demand is Endogenous allocative inefficiency (now possibly over-consumption of HC due to SID) and still misallocation of inputs (Drs performing simple tasks that could be performed by nurses) technical inefficiency (not a cost-minimizer) wealth transfer from patient to HC providers. These implications no different from the utility max model with exogenous demand [also technical and allocative inefficiencies] However, the policy implications of the third generation models are quite different!!

8. 317_L30, Mar 28, 2008, J. Schaafsma 8 Policies that Won’t Work if the Practitioner Firm is a Utility Maximizer & Demand is Endogenous expanding supply of intermediate HC professionals to increase competition and lower costs (recommended if 1 st and 2 nd generation models are correct) won’t work in third generation models  SID will simply expand demand to maintain the workload of peak professionals. can’t allow non-HC-professionals (businessmen) to own and and operate for-profit firms to achieve technical and allocative efficiency on the input side (recommended if 2 nd generation models apply)  violate the agency role, places patient at risk of exploitation don’t expand supply of peak professionals (recommendation from 1 st & 2 nd generation models)  fewer lower cost auxiliaries would be used  cost of production .

9. 317_L30, Mar 28, 2008, J. Schaafsma 9 Policies that May Work if the Practitioner Firm is a Utility Maximizer & Demand is Endogenous again need supply side management policies but quite the opposite from when demand is exogenous reduce supply of peak professionals and increase supply of intermediate level professionals  cost of HC . educate to improve efficiency create incentives for the use of auxiliaries as substitutes for peak professionals ///

10. 317_L30, Mar 28, 2008, J. Schaafsma 10 Section VII(2): Economic Modeling of Not-for Profit Acute Care Hospitals will first review some of the basic post WW II trends in the Canadian acute care hospital sector. then note the two key issues an economic model of a not-for-profit acute care hospital must address then look at two models and their implications for the two key issues

11. 317_L30, Mar 28, 2008, J. Schaafsma 11 Trends in the Acute Care Hospital Sector: Post WWII to mid 1970’s expenditure on acute care rose very rapidly in real terms  rapid expansion of the acute care hospital sector. beds per capita  to 5.4 beds per 1000 pop per capita rates of acute care hospitalization  real cost per patient day   average annual increase of 7% reasons for increase in real cost per patient day: - service intensity , i.e. more capital and labour used per patient day - real unit cost of inputs  (input prices up faster than general inflation)

12. 317_L30, Mar 28, 2008, J. Schaafsma 12 Trends in the Acute Care Hospital Sector since mid 1970’s steady decline in the number of beds per capita (to about 3.5 per 1000 pop today) per capita hospitalization rates have been declining average length of a hospital stay has been declining as a share of GDP hospital costs continued to rise through 1980’s, declined somewhat in the mid 1990’s, are rising again despite fewer beds per capita, lower hospitalization rates & shorter length of stay Reason  rising service intensity and rising real unit costs of inputs.///

13. 317_L30, Mar 28, 2008, J. Schaafsma 13 U.S./Canadian Hospital cost Trends in the U.S., service intensity has risen faster than in Canada in the U.S., unit cost of factor inputs has risen more slowly than in Canada on balance  U.S. hospital costs  faster than in Canada, i.e. in the U.S. the effect of the more rapidly rising service intensity has more than offset the more slowly rising factor input prices. QUESTION: if service intensity higher in the U.S than in Canada, are they over-serviced, or are we under-serviced, or a bit of both? what gives rise to these different service levels in countries that are so similar?  how are decisions made in hospitals???

14. 317_L30, Mar 28, 2008, J. Schaafsma 14 Two Models of the Not-for-Profit Hospital will look at two approaches to modeling the economic decision making process of not-for-profit hospitals: 1.Organic Model 2.Transactions models These are Bob Evans’ labels for these two types of models and are not universally used ///

15. 317_L30, Mar 28, 2008, J. Schaafsma 15 Two Key Issues a Model of a Not-for- Profit Hospital Must Address 1.Allocative Efficiency: -Admission rates per capita (too high, too low, just right?) - Service intensity per patient day (too high, too low, just right?) - length of stay (too short, too long, just right?) 2.Technical efficiency (is care produced at minimum cost given allocative efficiency?) ///