Market for Hospital Services

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Market for Hospital Services
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Outline

• Hospital Industry Structure
• Hospital Conduct
• Industry Performance

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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)

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U.S. Institutional Setting

• Hospital classification
• Community hospitals
• Teaching hospitals
• Private for profit, private not-for-profit,
  public not-for-profit

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Community Hospital Characteristics1970-2005
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Community Hospitals by Ownership Type
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Hospital Industry Structure

• of hospitals declined 15
• of beds declined 20
• Community hospitals
• Short-term stays (lt 7 days)
• Outpatient visits up dramatically
• Nonprofit 60
• For-profit 18
• State Local 22

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Area Hospitals
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Barriers to Entry

• Certificate of Need (CON) laws
• Required in certain states to open a hospital
  (designed to limit excess capacity)
• Economies of scale

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Size Distribution of Community Hospitals
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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
  200 beds
• Multi-hospital system
• Learning By Doing
• Over time, higher cumulative output, more
  experience leads to lower costs, higher quality.

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Vertically Integrated Systems

• Vertical associations between firms operating in
  different, but related product markets
• Insurers hospitals (Allina)
• Insurers physicians (Kaiser)
• Physicians hospitals (PHO)
• Advantages
• Solves the agency problem
• Lowers transactions costs
• Ensures supply of input
• Disadvantages
• Monopoly power

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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 dont 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

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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

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Models of Hospital Behavior

• Profit Maximization
• Utility maximizing models
• Physician-control models

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Pricing Practices in Medicine

• Price discrimination
• Cost shifting

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Hospital Price Inflation in the US
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Hospital Expenses by Ownership Type
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Charges and discounts for diagnostic bilateral
mammogram