Market for
Hospital Services
Outline
Hospital Industry Structure
Hospital Conduct
Industry Performance
Hospital Industry Structure
Is the hospital market competitive?
Competitiveness depends on:
 number of hospitals
 barriers to entry
 demand/ number of buyers
 types of services/technology
 asymmetric information (patients & hospitals)
U.S. Institutional Setting
Hospital classification
 Community hospitals
 Physician-owned specialty hospitals
 Teaching hospitals
 Private for profit, private not-for-profit, public
not-for-profit
Community Hospital Characteristics
1970-2007
Measure
No. of hospitals
Beds (thousands)
Beds per 1,000 population
Admissions (thousands)
Admissions per 1,000
population
Resident U.S. Population
Average length of stay
(days)
Percent occupancy
Outpatient visits
(millions)
Outpatient visits per
admission
Outpatient surgeries as a
percent of total
Cost per day ($)
Cost per stay ($)
1970
5,859
848.2
4.17
29,252
144.0
1980
5,904
992.0
4.38
36,143
159.6
1990
5,420
929.4
3.73
31,181
125.4
2000
4,915
823.6
2.93
33,089
117.6
2007
4,897
800.9
2.65
35,346
117.2
203.2
7.7
226.5
7.6
248.7
7.2
281.4
5.8
301.6
5.5
78.0
133.5
75.4
202.3
66.8
301.3
63.9
521.4
66.6
603.3
4.6
5.6
9.7
15.8
17.1
-
16.3
50.5
62.7
62.7
74
605
245
1,851
687
4,947
1,149
6,649
1,696
9,337
Source: Health, United States, 2009: With Chartbook on Trends in the Health of
Americans, Tables 104, 117, 118 and 136.
Community Hospitals
by Ownership Type
Year
Number of
hospitals
1975
1980
1990
2000
2007
5,875
5,830
5,384
4,915
4,897
Year
Number of beds
(thousands)
1975
1980
1990
2000
2007
941.8
988.4
927.4
823.6
800.9
For Profit
No.
%
775
730
749
749
873
13.2
12.5
13.9
15.2
17.8
For Profit
No.
%
73.5
87.0
101.4
109.9
115.7
7.8
8.8
11.0
13.3
14.4
Not-for-Profit
No.
%
3,339
3,322
3,191
3,003
2,913
56.8
57.0
59.3
61.1
59.5
Not-for-Profit
No.
%
658.2
692.5
656.8
583.0
553.7
69.9
70.0
70.8
70.8
69.1
Government
No.
%
1,761
1,778
1,444
1,163
1,111
30.0
30.5
26.8
23.7
22.7
Government
No.
%
210.2
208.9
169.2
130.7
131.4
Source: Health, United States, 2009: With Chartbook on the Health of Americans, Table 115, 200.
22.3
21.2
18.2
15.9
16.4
Size Distribution
of Community Hospitals
Bed Size
Category
0-24
25-49
50-99
100-199
200-299
300-399
400-499
500 and over
1970
6.8%
22.6
25.4
21.8
10.1
6.1
3.2
4.0
Percentage of Hospitals
in Each Bed Size Category
1980
1990
2000
4.4%
17.7
5.1
23.5
12.3
7.1
4.6
5.4
4.2%
17.4
23.5
24.3
13.7
7.6
4.1
5.3
5.9%
18.5
21.5
25.1
13.3
6.9
3.7
5.0
2007
7.3%
21.9
19.8
22.1
12.5
7.0
3.9
5.3
Source: Health, United States, 2009: With Chartbook on the Health of
Americans, Table 115.
Hospital Industry Structure
 # of hospitals declined 17%
 # of beds declined 15%
 Median size: 150 beds
 Short-term stays (< 7 days)
 Outpatient visits up dramatically
 Nonprofit
 For-profit
 State & Local
60%
18%
22%
Area Hospitals
Marietta
Memorial
Selby
CamdenClark
St.
Joseph’s
Type
NFP
NFP
NFP
NFP
Beds
199
25
375
325
Physicians
90+
na
150+
160+
1200+
250+
1300+
na
Staff
Barriers to Entry
 Certificate of Need (CON) laws
 Required in certain states to open a hospital
(designed to limit excess capacity)
 Economies of scale
 LRAC of community hospital reach minimum around
175-200 beds
 Multi-hospital system
 Learning By Doing
 Over time, higher cumulative output, more
experience leads to lower costs, higher quality.
Mergers
 Horizontal: merger of firms in same market
 Exploit EOS
 Reduce administrative costs
 Improve customer access to information
 Vertical: mergers of firms in upstream and/or
downstream markets
 Advantages
 Solves the agency problem
 Lowers transactions costs
 Ensures supply of input
 Disadvantages
 Monopoly power
Insurers & hospitals (Allina)
Insurers & physicians (Kaiser)
Physicians & hospitals (PHO)
Hospital Conduct
 Large # of sellers and low entry barriers promote
competition:
 Higher output and quality
 Lower price
 However, the hospital market has important
differences:
 Hospitals don’t necessarily maximize profits
 Role of Non-Profit Hospitals
 Government is a major payer
 Prices not set competitively
 Consumer less likely to shop around
 Insurance and asymmetric info
Empirical Evidence
 Studies prior to 1990 support the idea of a
“Medical Arms Race”
 Regions with more competition have:
 More excess bed capacity
 Larger # of duplicate specialized services
 After 1990, increased competition led to:
 Lower costs and improved quality
Models of Hospital Behavior
Profit Maximization
Utility maximizing models
Physician-control models
Hospital Income Flows
Sources of Funds
Uses of Funds
Patients self pay
3%
Private Insurance
36%
Philanthropy
5%
Medicare
29%
Medicaid
20%
Other government
Labor
Professional fees
Supplies, other
Depreciation and interest
53%
5%
34%
8%
7%
100%
100%
Pricing Practices in Medicine
Hospital Expenses
by Ownership Type
Year
1980
1990
2000
2007
Year
1980
1990
2000
2007
Expenses per Inpatient Day
For Profit
Not-for-Profit
Government
$ 257
752
1,057
1,536
$ 246
692
1,182
1,776
$ 239
634
1,064
1,472
Expenses per Inpatient Stay
For Profit
Not-for-Profit
Government
$1,676
4,727
5,642
7,823
$1,902
5,001
6,717
9,593
$1,750
4,838
7,106
9,523
Source: Health, United States, 2009: With Chartbook on the Health of
Americans, Table 136.
Hospital Price Inflation in the US
Year
1990
2000
2001
2002
2003
2004
2005
2006
Annual Percent Change
CPI
Hospital
Inflation
Services
4.7
9.9
2.5
4.2
2.8
6.6
1.6
8.7
2.3
7.3
2.7
5.9
3.4
5.3
3.2
6.5
Source: Health, United States, 2007: With
Chartbook on the Health of Americans, Table 120.
Pricing Practices in Medicine
Price discrimination
Cost shifting
 From Medicare patients to private patients
Charges and discounts for diagnostic
bilateral mammogram
Hospital (Location)
Official
charge
Medicaid Medicare
HMOs,
Health
plans
Policy on Uninsured
UCLA Medical Center
(Los Angeles)
$460
$127
$90
Up to $242 Gives discounts based on
individual's ability to pay, says CFO
Sergio Melgar
Oregon Health &
Science University
(Portland)
$240
$65
$59
Average
$128
Works with uninsured patients to
help them find financial aid; offers
sliding scales, payment plans
Jamaica Hospital
(Queens, N.Y.)
$351
$50
$96
$40 to $78
Has sliding fee scales for
uninsured, says CEO David Rosen
Johns Hopkins
Hospital & Health
System (Baltimore)
$261
$156
$173
$186
Grinnell Regional
Medical Center
(Grinnell, Iowa)
$285
$73
$79
$119 to
$190
State regulation of charges
reduces disparity between bills to
insured and uninsured
Works with uninsured to set a
payment schedule
Source: Lucette Lagnado, “A Young Woman, An Appendectomy, And a $19,000 Debt,” Wall Street
Journal, March 17, 2003, A1.
Pricing Practices in Medicine
Price discrimination
Cost shifting
 From Medicare patients to private patients
Problem Set #6
Market for
Pharmaceuticals
Pharmaceutical Industry
 Pharmaceuticals account for 12% of healthcare spending
 Drug companies spend 14% of revenues on R&D
 Industry Structure
 Basic research--supported by NIH labs and grants to
universities
 Applied research--development of marketable drugs
 284 new drug approvals from 1990-99:
 265 from industry
 9 from government
 10 from academia
The World's Top-Selling Drugs, 2008
Drug
Purpose
Maker
Global Sales
($billions)
Annual
Growth
Lipitor (2011)
Lowers cholesterol
Pfizer
$13.7
-0.9%
Plavix (2011)
Blood-thinner
Bristol-Myers Squibb
and Sanofi-Aventis
$ 8.6
16.9%
Nexium (2015)
Treats ulcers
AstraZeneca
$ 7.8
7.8%
Advair (2010)
Treats asthma
GlaxoSmithKline
$ 7.7
7.0%
Enbrel (2012)
Treats arthritis
Amgen/Wyeth
$ 5.7
5.6%
Seroquel (2011)
Anti-psychotic
AstraZeneca
$ 5.4
14.9%
Zyprexa (2011)
Anti-psychotic
Eli Lilly
$ 5.0
-1.8%
Remicade (2018)
Treats arthritis &
Crohn’s Disease
Centocor
$ 4.9
14.0%
Singulair (2012)
Treats asthma
Merck
$ 4.7
3.1%
Lovenox (2007)
Treats deep vein
thrombosis
Sanofi-Aventis
$ 3.8
8.9%
http://pharmexec.findpharma.com/pharmexec/Special+Reports/2009-PharmExec-Top-50/ArticleStandard/Article/detail/597526
Top 10 Global Pharmaceutical Companies
R&D Process in Pharmaceuticals
 Kefauver-Harris Amendment (1962)
 Thalidomide scare (1957-61)
 Established safety and efficacy standard
 Drug advertising must disclose side effects
 R&D Process
 $55 billion spent by US pharma in 2006
 DiMasi et al. (2003): average out-of-pocket cost for a new
approved drug is $403m (and fully capitalized cost is $802m)
R&D Process
New Drugs Introduced into the US Market 1940-1990
Country of Origin
Number of New Drugs
Percentage
764.0
60.4
Switzerland
89.0
7.0
United Kingdom
81.5
6.4
West Germany
73.0
5.8
France
39.5
3.1
Japan
26.5
2.1
Belgium
23.0
1.8
Sweden
18.5
1.5
Denmark
17.5
1.4
Holland
15.0
1.2
Italy
13.4
1.0
Mexico
10.0
0.8
Canada
5.0
0.4
Other countries
24.0
1.9
Source not ascertained
75.0
6.0
1,265
100.0
United States
Total
Source: Weidenbaum (1993)
Is the FDA too Risk Averse?
Two Types of Error in FDA Approval Decision
Drug Is Beneficial
Drug Is Harmful
Type 1 Error:
Allowing a harmful drug.
FDA Allows
the Drug
Correct Decision
Victims are identifiable and
traceable, and might appear on
Oprah.
Error is self-correcting
Type 2 Error:
Disallowing a beneficial drug.
FDA Does
Not Allow
the Drug
Victims are not identifiable
and scarcely even
acknowledged in the
abstract.
Error is not self-correcting
Correct Decision
Regulating Drug Prices
 The economics of drug pricing
 High fixed costs; low marginal costs
 Problem Set #12
 Price controls in the U.S. and abroad
 Danzon (1996): role of generics
 Impact of price controls on new drug
development?
R&D vs. Promotion Spending
Source: R&D Spending: Pharmaceutical Research and Manufacturers of America,
PhRMA Annual Membership Survey, 2004. Promotional Data: IMS Health,
Integrated Promotional Services™ and CMR, 6/2004
Benefits of Pharmaceuticals
.
New Medicines Account for 40% of
Increase in Life Expectancy
Number of Years Added to Longevity
2.0
Increase in Longevity
due to NCE launches
Total Increase in
Longevity
1.5
1.0
0.5
0.0
1988
1990
1992
1994
1996
1998
2000
Source: F.R. Lichtenberg, “The Impact of New Drug Launches on Longevity: Evidence from
Longitudinal, Disease-Level Data from 52 Countries, 1982-2001,” NBER: June 2003.
.
New Drugs Reduce Visits to Hospital and ER:
Asthma Management Program Improves
Outcomes for Children with Asthma
90%
85%
Percent of Patients
80%
70%
55%
60%
50%
35%
40%
30%
30%
20%
10%
0%
Before
Program
After Program
ER Visits
Before
Program
After Program
Hospitalizations
Source: P.J. Munzenberger and R.Z. Vinuya, “Impact of an Asthma Program on the Quality of Life of
Children in an Urban Setting,” Pharmacotherapy, 22 (2002).
Cost of Drug Therapy vs Surgery
Disease
Cost of
Surgery
Cost of Drug
Therapy
Drug Therapy
as Percent of
Surgery
Ulcers
$28,900
$900
3.1%
Heart Disease
$43,370
$300
0.7%
Gallstones
$12,000
$1,000
8.3%
Source: Weidenbaum (1993)
Confounding Factors
HC Expenditures = P * Q
 Lifestyle
 Age
 Legal issues
 Technology
• Pricing
• Intensity of use
Lifestyle Effects
 AIDS
 STDs
 Teenage pregnancies
Liberal perspective:
 Alcohol abuse
 Cigarette smoking
 Drug Use
 Obesity
due to failure in economic system in
providing sufficient income earning
opportunities
due to breakdown of traditional
Conservative perspective: family values with government as a
contributor
AIDS Cases in the U.S.
Year
1985
1990
1995
2000
2005
2007
Males, 13 years
and ol der
7,484
36,180
56,650
30,387
26,525
26,355
Females, 13 years
and ol der
519
4,544
12,978
10,763
9,548
9,579
Chil dren < 13
Years Ol d
128
725
745
117
54
28
Total
8,131
41,449
70,373
41,267
36,127
35,962
All Years
810,676
198,544
9,209
1,018,428
Source: Health, United States, 2009: With Chartbook on Trends in the Health of Americans, Tab le 48.
Cases have stabilized at 36,000 annual cases
AIDS by Exposure Category
1990
Number, by year of report
1995
2000
2007
Percent
Di stribution
Total To Date
100.0
40,740
69,774
40,230
35,962
Total To
Date
1,018, 428
23,658
30,944
13,648
16,749
487,695
47.9
IV drug users
9,270
18,802
8,099
6,010
255,859
25.1
Homosexual/bisexual
males and IV drug user
2,943
4,185
1,587
1,664
71,242
7.0
High-ri sk heterosexual
contact
2,253
8,479
6,565
11,111
176,157
17.3
Hemophilia/Blood
tranfusion
1,117
1,032
395
401
18,266
1.8
Source
Total Case s
Homosexual/bisexual
males
Source: Health, United States, 2002: With Chartbook on Trends in the Healt h of Americans , 2002, Table 55.
And HIV Surveillance Report, 2007, Vol. 19.
AIDS in America
Extent of AIDS
 Worldwide: 36-40m living with HIV; 22m deaths
 United States: 1m cases; 400,000+ deaths
Medical care issues
 Hellinger (1992): lifetime costs of $70,000
 Cocktail
Protease inhibitors: $7400/yr
AZT: $3500/yr
3TC: $2800/yr
$12,000 - $16,000 pppy
$16,000 x 750,000 = $12 billion
Drug Abuse
Extent of Drug Use
Cost to society
Intervention strategies
Use of selected substances in the
past month, by age, 2007
Age
Any Illicit
Drug
Marijuana
Alcohol
Cigarettes
12-13 yrs
3.3
0.9
3.5
1.8
14-15 yrs
8.9
5.7
14.7
8.4
16-17 yrs
16.0
13.1
29.0
18.9
18-25 yrs
19.7
16.4
61.2
36.2
26-34 yrs
10.9
7.9
62.6
33.4
4.6
3.0
52.2
22.0
51.1
24.2
35 +
12 and over
8.0
5.8
Source: Health United States, 2009: With Chartbook on Trends in the Health of Americans,
2009, Table 63.
Use of selected substances among
US high school seniors
Year
Alcohol
Cigarettes
Marijuana
Cocaine
Inhalants
MMDA
1980
72.0
30.5
33.7
5.2
1.4
--
1990
57.1
29.4
14.0
1.9
2.7
--
1995
51.3
33.5
21.2
1.8
3.2
--
2000
50.0
31.4
21.6
2.1
2.2
3.6
2003
47.5
24.4
21.2
2.1
1.5
1.3
2004
48.0
25.0
19.9
2.3
1.5
1.2
2005
47.0
23.2
19.8
2.3
2.0
1.0
2006
45.3
21.6
18.3
2.5
1.5
1.3
2007
44.4
21.6
18.8
2.0
1.2
1.6
Source: Health United States, 2009: With Chartbook on Trends in the Health of Americans,
2009, Table 64.
Prevalence of Tobacco Use
25 Years and Older
Percent smokers
Year
1974
1979
1985
1990
1995
2000
2005
2006
2007
Male
42.9
37.3
32.8
28.2
26.4
24.7
22.7
22.9
21.4
Female
32.0
29.5
27.5
22.9
22.9
20.5
18.0
17.9
17.2
Source: Health United States, 2009: With Chartbook on Trends in
the Health of Americans, 2009 Tab le 61.
Economic Costs of Drug Abuse in the US, 2000
(millions of dollars)
Cost Categories
Estimated Cost
Health Care
Community-based Drug-abuse Treatment
$5,594
Federally Provided Drug-Abuse Treatment
$506
Support for Drug Abuse-Related Health
Services
$2,084
Medical Consequences of Drug Abuse
$6,715
Total Health Care
$14,899
Productivity Losses
Premature Death
$18,256
Drug Abuse-Related Illness
$25,435
Institutionalization/Hospitalization
$1,915
Productivity Loss of Victims of Crime
$2,217
Incarceration
$35,601
Crime Careers
$27,066
Total Productivity Losses
$110,491
Other Costs
Cost of Goods and Services Lost to Crime
Social Welfare Administration
Total Other Costs
Total Economics Costs
Source: US National Drug Control Policy, 2001
$35,056
$218
$35,274
$160,664
Is Addiction Rational?
 When does a habit become an addiction?
 Becker and Murphy (1988)
 Past consumption increases current consumption
 People make forward-looking consumption plans
 Policy Implication: if cigarette taxes are credibly
announced to double in one year, then current
consumption will decrease
 Gruber and Koszegi (2001)
 Forward looking behavior is not consistent over time
 Policy should take into consideration not only
externalities of behavior, but “internalities”
Smokers die on average 6.1 years
prematurely. At $100,000/year,
cost per pack smoked is $30.45
Obesity
 BMI > 30
Obesity
 BMI > 30
 30% of Americans
 Health Problems





Diabetes
Hypertension
Cardiovascular disease
Colon cancer
Postmenopausal breast cancer
 Finkelstein, Fiebelkorn, and Wang (2003)
 Direct costs of obesity ~ $90 billion
 9% of total medical expenditures
Aging of the Population
Elderly in the U.S.
 Percent of total civilian population
Year
1950
1960
1970
1980
1990
1995
2000
2005
2010
2020
2030
2040
2050
Over 65
8.1
9.2
9.9
11.3
12.5
12.8
12.4
12.4
13.3
16.4
20.1
20.7
20.4
65-74
5.5
6.1
6.1
6.9
7.3
7.2
6.5
6.3
7.0
9.5
10.9
9.1
8.8
75-84
2.2
2.6
3.0
3.4
4.0
4.2
4.4
4.4
4.4
4.8
6.7
7.9
6.8
Over 85
0.4
0.5
0.7
1.0
1.2
1.4
1.5
1.7
2.0
2.1
2.5
3.7
4.8
Source: Economic Report of the President, 1994, Table B-32, p. 305 and Health, United States, 2007 Table 1.
Personal Health Care Expenditures by
Age and Type of Service (2004) Per capita dollars
Age Group
Personal
Health Care
Hospital
Care
Physicians’
Services
Nursing
Home
Services
Other
Less than 19
$ 2,650
$ 1,000
$ 753
$ 18
$ 879
4,511
1,636
1,256
127
1,492
65 + over
14,797
5,403
3,024
2,526
3,844
65-74
10,778
4,191
2,716
809
3,062
75-84
16,389
6,178
3,463
2,623
4,125
85 + over
25,691
7,916
3,037
8,706
6,032
5,276
1,928
1,339
115.0
1,894
19-64
All ages
Source: http://www.cms.hhs.gov/NationalHealthExpendData/downloads/2004-age-tables.pdf
Utilization of Medical Care
Resources, 2005
Age Group
Less than 18
18-44
45-64
65-74
Over 75
All persons
Out-Patient
Visits per
100
Population
33
26
32
41
38
33
Days of
Hospital
Care per 100
Population
19.2
33.1
59.2
139.9
259.4
55.4
Source: Health, United States, 2003 and 2007.
* 2001 data.
Inpatient
Procedures
per 100
Population
(Males)*
4.0
5.0
16.2
37.6
56.5
12.5
Inpatient
Procedures
per 100
Population
(Females)*
3.7
19.0
15.2
33.0
45.6
16.7
Physician
Office Visits
Per 100
Population
253
224
391
647
768
329
Americans' Current Health Care
Expenditures Are Concentrated in
the Final Part of the Life Span
Source: Joanne Lynn, David M. Adamson, Rand Health White Paper WP137 (2003). Available at http://www.medicaring.org/whitepaper/
Legal System and
Malpractice
Medical Malpractice Tort Costs
0.30%
$30
0.25%
$25
Billions .
0.20%
$20
Share of GDP
0.15%
$15
Tort Costs
0.10%
$10
0.05%
$5
$0
1975
0.00%
1980
1985
1990
1995
Source: 2009 Update on U.S. Tort Costs, Towers Perrin, 2009.
2000
2005
Share of GDP
$35
.
(Billions of 2008 $)
Tort Law in the United States
Four elements of a tort case
 Presence of a physician-patient relationship
 An adverse outcome
 Negligence by the provider
 Direct causality between the negligence and
adverse outcome
Purpose of tort law
 Compensation
 Deterrence
 Retribution
Claims Frequency by Specialty
Date
All
Physicians
General/
Family
Practice
Internal
Medicine
Surgery
Obstetrics/
Gynecology
1985
10.2
5.7
6.2
16.8
25.8
1986
9.2
7.6
5.5
15.8
13.0
1987
6.7
5.7
4.5
12.7
8.0
1988
6.4
6.2
4.3
10.2
15.1
1989
7.4
6.6
5.9
11.2
13.5
1990
7.7
5.9
6.2
11.5
11.9
1991
8.2
5.7
5.5
14.0
11.6
1992
9.1
6.9
7.3
15.5
15.6
1993
9.8
7.1
7.9
18.9
22.5
1994
9.5
6.7
5.7
16.9
19.2
1995
9.0
6.2
5.7
14.9
20.9
1996
9.0
6.7
5.3
14.9
13.1
Source: Martin L. Gonzalez, ed., Socioeconomic Characteristics of
Medical Practice, Chicago: American Medical Association, various
years.
Malpractice Premiums by Specialty
as a percentage of professional expenses
All
Physicians
General/
Family
Practice
Internal
Medicine
Surgery
Obstetrics/
Gynecology
10.2
10.8
12.1
11.3
10.4
9.7
8.7
7.6
7.9
8.2
7.4
6.5
7.0
6.1
7.3
7.7
7.0
5.8
5.5
5.2
4.9
5.4
5.0
4.0
6.4
6.4
7.1
6.6
5.9
6.6
5.0
4.9
4.9
4.6
4.7
4.6
12.2
14.3
14.9
14.1
12.7
11.3
10.4
8.6
9.2
8.9
8.8
7.1
17.8
19.6
20.4
18.6
18.7
16.1
14.8
14.3
14.2
19.0
14.4
13.2
Year
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Source: Martin L. Gonzalez, ed., Socioeconomic Characteristics of Medical
Practice, Chicago: American Medical Association, various years.
International Comparison of
Malpractice Awards (2001)
Claims per 100 physicians
Claims per 100,000 population
Average claim awarded (PPP US $)
United
States
Australia
Canada
United
Kingdom
7.67
4.72
1.90
6.00
18
12
4
12
$265,103
$97,014
$249,750
$411,171
Source: Anderson, Hussey, Frogner, and Walters (2005)
Causes of Increased Litigation
 Increased supply of lawyers
 Increased litigiousness in US
 Increased medical cost and physicians’ salaries
 Breakdown of physician-patient relationship
 Pro-plaintiff trend in common law doctrine
 Size of damage awards
 Increased technology in medicine
Silicone Implant Litigation
 Silicone implants first introduced
in 1962 by Dow Corning
 FDA relabeled implants as class
III medical device in 1988
 FDA moratorium in 1992
 National class action lawsuit with
thousands of plaintiffs
 $4.25 billion settlement with 40%
going to attorneys
 Dow Corning bankruptcy
 FDA removed moratorium in 2006
Medical Technology
 Technological change
 Cost-increasing technological change
 Cost-decreasing technological change
MRI Machines, 2007
MRI (per million population)
0
10
20
30
Japan
40.1
United States
25.9
Iceland
19.3
Italy
18.6
16.0
Korea
Finland
15.3
Switzerland
14.4
Greece
13.2
OECD
11.0
Luxembourg
10.5
Denmark
10.2
Spain
9.3
New Zealand
8.8
United Kingdom
8.2
Germany
8.2
Canada
6.7
France
5.7
Turkey
5.6
Australia
5.1
4.4
Czech Republic
Poland
Mexico
40
2.7
1.5
CT Scanners, 2007
CT Scanners (per million population)
0
10
20
30
40
50
60
80
90
100
92.6
Japan (2002)
56.0
Australia
37.1
Korea
34.3
United States
Iceland
32.1
30.3
Italy
27.3
Luxembourg
25.8
Greece
22.8
OECD
Sw itzerland
18.7
17.4
Denmark
Finland
16.4
Germany
16.3
Spain
14.6
Ireland
14.3
Canada
12.7
New Zealand
12.3
France
10.3
Poland
9.7
Turkey
8.1
United Kingdom
7.6
Mexico
70
4.0
te
d
Cz
ec
h
Un
i
te
d
Au
st
ra
lia
Fr
an
ce
Re
pu
bl
ic
y
ng
do
m
Hu
ng
ar
Ki
Ca
na
da
Sp
ai
n
O
EC
D
Be
lg
iu
m
bo
ur
g
nd
at
es
Ic
el
a
St
Lu
xe
m
Un
i
MRI Exams per 1000 population
2007
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
te
d
Un
i
te
d
Cz
ec
h
at
es
nd
lia
Fr
an
ce
y
ng
do
m
Hu
ng
ar
Ki
Sp
ai
n
Re
pu
bl
ic
Au
st
ra
Ca
na
da
O
EC
D
Ic
el
a
Be
lg
iu
m
bo
ur
g
St
Lu
xe
m
Un
i
CT Exams per 1000 population
250.0
200.0
150.0
100.0
50.0
0.0
High-cost Medicine
 Heart disease
 Angioplasty: 1 million @ $10,000 each
 CABGS: 500,000 @ $50,000+ each
 Heart transplantation: 2,212 @ $787,000 each
 Infertility treatment
 IUI (intrauterine insemination): $1000-$2000 per cycle
 IVF (in vitro fertilization): $10,000-$12,000 per cycle
 GIFT (gamete intrafallopian transfer): $15,000-$20,000 per cycle
Organ Transplantation
 History
 National Organ Transplant Act (1984)
What Can be Transplanted?
 Organs








Cornea (1905)
Kidney (1954)
Pancreas (1966)
Heart (1967)
Liver (1967)
Lungs (1987)
Intestines (1987)
Penis (2006)
 Tissue






Skin
Bone marrow
Bone
Blood vessels
Hand (1998)
Face (2005)
National Organ Transplant Act (1984)
 Banned sale of organs in US
 5 year prison
 $50,000 fine
 Created Organ Procurement and Transplantation Network
(OPTN)
 Regional system of organ distribution
 Hospitals required to notify OPTN of possible donors
 Hospitals required to notify potential donors of their options
 United Network for Organ Sharing
 Operates OPTN
 Allocation Criteria




Medical History
Blood type
Location
Time on Waiting List
Number of U.S. Transplants
Year
Kidney
Pancreas
Liver
Heart
Lung
69
109
439
542
436
379
6,530
Kidney/
Pancreas
458
919
915
903
837
854
16,710
1990
1995
2000
2005
2008
2009
Total to date
9,417
11,084
13,619
16,483
16,520
16,829
284,156
Candidates
on Waiting
List
2,690
3,934
4,997
6,444
6,319
6,320
100,784
2,107
2,363
2,199
2,125
2,163
2,212
47,487
89,537
1,496
2,284
16,574
$259,000
$275,200
$439,000
1-year (%)
95.6
95
3-year
90.3
90.2
2008 Average
Billed Price
Intestine
203
872
959
1,406
1,478
1,661
19,775
Heart/
Lung
52
69
48
35
27
29
1,021
3,166
1,881
72
241
$523,400
$787,000
$450,400
$1,123,000
$1,121,800
94.4
86.7
88.0
83.2
55.6
82.2
90.4
78.3
79.3
62.2
44.3
57.0
5
46
82
178
185
178
1,884
Patient
survival rate
Market for Organs
 Supply and demand for organs
 Property rights
 U.S. policy—required request
 Rest of Europe—presumed consent
Deceased and Living Kidney Donors
1990- 2009
8000
7000
6000
5000
4000
Deceased
Living
3000
2000
1000
0
1990
1995
2000
2005
2010
Market for Body Organs
 Gov’t prohibits trade
in organs
 At P = 0: Qd > Qs
 shortage results
S1
Price
P1
 Non-Price Rationing




Black Market
Bribes
Discrimination
Wait / Search
D1
16
90
Kidneys
(1000s)
Shortage
Wait List Death Rates
1995-2009
40
35
30
P
e
25
r
c
e
20
n
t
a 15
g
e
10
5
0
1994
1996
1998
2000
Kidney
2002
Liver
2004
Heart
Lung
2006
2008
2010
Organ Rationing Schemes
Allocation
Methods
Waiting time
Priority to
sickest first
Benefits
Costs
Equitable
Inappropriate matching;
organ wastage; no
consideration of urgency
Equitable
Higher retransplantation and
death rates; less benefit
overall
Priority to
sickest last
Higher overall
survival; less
retransplantation
Sickest patients die
Best
Biological
Match
Higher overall
survival; less
retransplantation
Fewer transplants for certain
groups, including highly
sensitized patients and some
minorities
Source: Charles T. Carlstrom and Christy D. Rollow, The Cato Journal (Vol. 17, #2) Fall 1997
Market for Body Organs
 Gov’t prohibits trade
in organs
S2
 At P = 0: Qd > Qs
 shortage results
P1
 Non-Price Rationing
P2




Black Market
Bribes
Discrimination
Wait / Search
 Free Market: P2, Q2
S1
Price
D1
16
Q2
Shortage
90
Kidneys
(1000s)
Iranian Model
 Legalized the sale of kidneys
 Officially approved patients’
organization oversees all
transactions
 Donors get $2000 - $4000
 Waiting list has been eliminated
Source: The Economist, November 16, 2006, available at http://www.economist.com/world/international/displaystory.cfm?story_id=8173393
Cost of Transplant Surgery, 2008
Organ
Number
Transplanted
Kidney
Heart
Liver
Heart/Lung
Pancreas
Lung
16,520
2,163
6,319
27
436
1,478
Total
26,943
Estimated
Cost1
(millions)
$
Estimated
Average Cost
per
transplant
Number on
Waiting List
4,278.7
1,703.8
3,307.4
30.3
120.1
665.7
$ 259,000
787,700
523,400
1,123,800
275,500
450,400
89,537
3,166
16,574
72
1,496
1,881
$10,106.0
-
112,726
1. Number transplanted times average cost of the transplant procedure.
2. Number on waiting list times average cost of the transplant procedure.
Estimated
Cost if Donor
Organs were
Available2
$
23,190
2,494
8,675
81
412
847
$35,699
Total
Estimated
Cost
(millions)
$
27,469
4,197
11,982
111
532
1,513
$45,805