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

2. 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

3. 20 th Century Hospitals l 1900-1920: 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

4. 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

5. 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

6. Community Hospital Characteristics, 1970-2001

7. Community Hospitals, by Ownership Type

8. 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

9. Pricing Practices in Medicine l Price discrimination l Cost shifting

10. Charges and discounts for diagnostic bilateral mammogram

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

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