Teleconference2
Non-Profits and Hospital
Behavior
Part 1: Review of Homework
1. What is the rational for employer-provided health insurance in the US? What are
the benefits of such a system? What are the costs? Should employers be involved
in providing health insurance for their workers?
2. What is the role of market power between hospitals, insurance companies and
consumers in relation to healthcare costs? How does this relate to the policy ideas
of insurance exchanges, accountable care organizations, and employers? How
would an “all payer” system be beneficial? What are the downsides to this?
Wall Street Journal –hospitals negotiating deals with insurance companies in the
exchanges
Paper Discussion:
Burns and Pauly, “Accountable Care Organizations May have Difficulty
Avoiding the Failures of Integrated Delivery Networks of the 1990s”
Altman, “The Lessons of Medicare’s Prospective Payment System
Show that the bundled Payment Program Faces Challenges”
Hospitals and the Role of Nonprofit
Firms
• Why is the not-for-profit Form Dominant?
1. Contract Failure
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Consumers may trust non-profit
2. Public Good Nature of Healthcare
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Nonrivalness
Nonexcludability
The Role of Nonprofit Firms
• Why is the not-for-profit Form Dominant?
What part of healthcare is public good?
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•
•
•
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Services to the uninsured
Excess capacity
Patient educational and social services
Care for particular diagnostic groups
Teaching and research
The Role of Nonprofit Firms
• Why is the not-for-profit Form Dominant?
3. Cartel Theory
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•
Nonprofits are a form of market failure
Nonprofits are dominant because this is in physicians’
collective interest.
4. Inertia
• “owners” of nonprofits are not well-defined
• Current stakeholders may have incentive to
oppose conversions.
The Role of Nonprofit Firms
• What is the objective of nonprofit hospitals?
1. Altruistic models where hospitals “do the right thing”
producing the result that maximizes social welfare.
2. Utility Maximizing models where the objective of the
hospital is to maximize the utility of the decision makers
(trustees, hospital administrators, employees). May lead
to excess investment in capacity, quality, staff, etc.
3. Physician Control Model where the physicians act as the
residual claimant of the hospital.
The Role of Nonprofit Firms
• How do private nonprofits differ from forprofit hospitals?
• Costs -- to the extent that the residual claimant is
not well defined, we would expect nonprofits to
be less efficient (in terms of cost). Yet, few
differences are found
• Cost Shifting/price discrimination –but not much
difference in pricing behavior between NFP and FP
hospitals
The Role of Nonprofit Firms
• How do private nonprofits differ from forprofit hospitals?
• Uncompensated Care – again we might expect to see large
differences, but not so much. And when consider tax
revenue paid by for profits, things are “even more equal”.
• Quality – evidence is somewhat mixed, but no clear
evidence of differences
• Entry and Exit – nonprofits are quicker to enter a market in
response to demand growth and less likely to exit in
demand reductions. Suggests nfp hospitals derive utility
from greater quantity.
The Role of Nonprofit Firms
• How do private nonprofits differ from forprofit hospitals?
• Bottom line – one is struck by the similarity between notfor-profit and for-profit performance.
• Different objectives but constraints on both sides pushing them
together.
Hospital Competition
How do Hospitals Compete With Each Other?
• Consumer-Driven Competition
• Inelastic Demand, third-party payers (assume passive)
• Competing in price may not be too effective
• Non-price competition
• Physician referral, overall reputation.
• Hospitals may race to achieve the highest RELATIVE
quality
• Medical Arms Race
Hospital Competition
How do Hospitals Compete With Each Other?
• Implication of Medical Arms Race
• Competition is bad since it leads to excess investment
and too much quality. More competition will result in
higher prices and costs. Thus we should discourage
competition among hospitals
• Certificate of Need
• Very Loose Merger Policy
Hospital Competition
How do Hospitals Compete With Each Other?
• Payer-Driven Competition
• As manage care and other less passive insurance
companies gained market power, and they were
allowed to engage in selective contracting with
hospitals, price once again became an important
variable.
• Now hospitals were forced to compete in price to get
the managed care contracts.
Hospital Competition
• Proton Beam Therapy
– Medicare pays around 50k for treatment of
prostate cancer, about twice as other types of
radiation. But no evidence it is more effective.
– Shown to be more effective in some rare pediatric
cancers. But fewer than 3500 cases per year, can’t
keep the 9 existing centers in use, and 20 more in
planning or construction
– Comparative effectiveness research and dynamic
pricing
Hospitals and the Role of Nonprofit
Firms
How do Hospitals Compete With Each Other?
• Do we really need 3 children’s hospitals in San Antonio?
• Methodist Children’s
• CHRISTUS, Baylor College of Medicine, Texas Children’s
Hospital
• Vanguard, CHOP, UTHSCSA
The role of future risk sharing models of
compensation may change the face of
competition (ACOs, Bundled Payments, Selective
Contracting)
Mergers and Anti-Trust
– Mergers can increase efficiency
• Economies of scale.
• Economies of scope
• Improved Management. Acquiring a badly run firm and
installing better management produces gains.
• Reduce the negative effects of nonprice competition.
• EMR and other technological Innovation has increased
economics of scale,
• Likewise for the future of reiumbursement
– Mergers can lower efficiency
• Market or Political Power. The main disadvantage of a
horizontal merger is that the resulting firm would face less
competition and acquire additional market power.
Mergers and Antitrust
Kaiser Health News – “humongous monopoly” drives
prices high
Journal of Healthcare Management – hospitals need
at least 160% of Medicare to survive!