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Hospitals(part 2)

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Outline1) Why is Non-Profit Dominant?2) What is their Objective?3) Cost Shifting vs. Price Discrimination4) How do Hospitals Compete?5) Consolidation6) Pricing

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Hospital Trends Downward trend in the number of

hospitals Expected to continue as consolidation

continues and care moves out of the hospital. For-profit hospitals are on the rise, but

Nonprofits are still a large majority, why?

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Legal Distinctions NFP do not distribute accounting profit to

individual equity holders Rather it goes as a dividend to its

sponsors NFP exempt from corporate income and

property taxes Better access to tax exempt bond

financing Eligibility for private donations For-profits have access to tax exempt

bonds and can raise equity capital through sale of stock

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Why is the Non-Profit Dominant?

Contract failure Asymmetric information Shopping problem Trust between patient and physician

Public goods Inertia• Many “nonprofits” make a

large profit Tax exempt vs. nontax exempt

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What is the Objective a Non-Profit Hospital?

Most firms exist to maximize profits But for a NFP, what is their objective?

“Profit” Maximization No Margin, no mission?

Utility Maximization Physician Control

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How do For Profit Hospitals Compare to Private Non Profits? Costs and Pricing Uncompensated Care 4.5% vs 4% Quality Entry and Exit

NFP quicker to enter a new market and slower to exit

Bottom Line: Very hard to “see” a difference

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Hospital FinancingPayment-to-cost ratio

Private Medicare Medicaid Other Uninsured0

0.2

0.4

0.6

0.8

1

1.2

1.436.8

38.7 14.91.7

5.8

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Price Discrimination vs. Cost Shifting

Price Discrimination – Selling different units of output at different prices based on the buyer’s willingness/ability to pay Senior citizen discounts, hardback vs. paperback

books, new car prices, hospital pricing Cost Shifting – special case of price discrimination

where the lower price from one group causes the firm to charge higher prices to another

Both require some degree of market power, but cost shifting implies more Firm not maximizing profits to begin with Payer is passive/powerless

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Implication of cost shifting Hospital are victims of inadequate public spending

“hospitals shifting costs from Medicare to private payers and employers is seen as the number one reason for higher medical cost trends [of private insurers].” PwC

A dollar reduction in public payment will result in a dollar increase in private payment

2007 study estimates $88.8 Billion shifted to private insurers $51.0 from hospitals (24.8 Medicare, 16.2 Medicaid) 37.8 from physicians (14.1 Medicare, 23.7 Medicaid)

Relying on the private sector to curb health care spending will be inadequate.

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Cost Shifting Most economist don’t buy it

Thought experiment Empirical support is limited

Some evidence prior to the 1990s Much less evidence in recent research

Unless…. Hospital consolidation

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How do Hospitals Compete? Normally competition leads to lower

prices and decreased costs. In hospitals it is often argued the opposite

occurs. Some research shows that when hospital

markets become more competitive there is increased costs and higher prices to consumers

Policy implications are to discourage competition

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Hospital Competition Medical Arms Race

“Consumer-Driven” Competition Hospitals compete not in the price/quality

space but in a “relative” competition Physicians Perceived quality relative to competitors Incentive to over-invest in technology and expand

into “unprofitable” services

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Hospital Competition Policy Reaction to MAR

CON Laws Hospitals must justify the need is there for a

particular service or facility prior to adding it. Non CON states such as Texas have seen some of

the largest examples of this type of behavior Anti-Trust Policy

Implication is that monopolies are not so bad Mergers that would have been blocked in other

industries have been allowed in hospitals

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Hospital Competition Evidence on MAR

Research prior to the 1990s tends to find that when markets become more competitive, then there is an increase in costs and consumers face higher prices. Contrary to standard economic theory

Research looking at data in the 1990s found the opposite: More competitive markets resulted in lower prices

and costs

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Hospital Competition Payer Driven Competition

When hospitals compete for patients via insurance contracts, we find markets tend to work well. In most markets the individual paying the bill and consuming the

product are the same so this is not an issue Selective contracting

By the end of the 1990s the Medical Arms Race was considered dead

But as consumers have demanded choice in providers, selective contracting has become much less selective Robotic Surgery Proton Beam Therapy Children’s hospitals

Policy should be focused on getting providers to compete for contracts.

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Provider Consolidation Consolidation Trends in the 1990s

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Provider Consolidation Rise of Local Hospital Systems

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An New Wave

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Merger and Acquisition

The Affordable Care Act represented a "tectonic shift" in the way hospitals do business and many are left with few choices but to be acquired or merge with another entity.

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It is not just acquisition Affiliation

Most flexible form of consolidation Utilized to increase footprint, gain economy of

scale, create referrals, etc. Do not necessarily change management or

governance Joint Venture

Mildly flexible Used to create something new that might be

overwhelming to do solo Shared governance Some form of profit/risk sharing

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It is not just acquisition Joint Operating Agreement

Virtual mergers – assets may separate but services are coordinated

New overarching governance board, but hospitals maintain independent boards as well

May borrow for capital investments as one organization

Similar to JV but larger

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It is not just acquisition Merger

Mutual decision of two companies to combine Leadership may be a combination of the two

hospitals or from an outside source Hospitals absorb each other’s assets and

debts Acquisition

Purchase of one hospital by another

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Provider Consolidation Horizontal Consolidation

Hospital to hospital Vertical Consolidation

Hospital to physician practice Hospital to long-term care Hospital/physician group to payer

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Reasons for Consolidation Economies of Scale

As the size of the organization increases the average cost of producing the good declines Specialization of labor Efficient use of capital Lower input prices for buying in bulk

HITECH ICD-10 (18,000 to about 150,000 codes) New forms of financing

Accountable Care, Bundled Payment and other forms of capitation

Consolidations lead to lower costs, benefit consumers

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Reasons for Consolidation

“Hospitals with private rates below 160 percent of Medicare will have difficulty” Journal of Healthcare Management

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Reasons for Consolidation Bargaining power

If consolidation helps hospitals by allowing them to negotiate better rates from payers, then this is not good for the consumer.

From the hospital’s perspective it doesn’t matter if it is economies of scale or bargaining power, but from society’s perspective it matters

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Coordination vs. Competition Coordination

Essential for delivering high quality care Breaking down the silos

Competition Essential for innovation and driving higher

value There needs to be a balance

If coordination leads to integration that can reduce competition Need to watch quality and quantity as well as

price

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Hospital Pricing Hospital pricing has received much

attention lately Prices that private plans pay are opaque to

both consumers and to payers Details of contracts are kept secret Complexity of medical care Employers and employees pay the prices but are

not aware of the contract details Silos in health care

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Hospital Pricing

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Hospital Pricing

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Hospital Pricing It is clear that high prices lie at the heart

of the health spending problem in the US We don’t fully understand why prices vary

across services and across providers. Research from the Center for Studying

Health System Change, September 2013 Examined 13 metropolitan areas

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Hospital Pricing

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Hospital Pricing

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Hospital Pricing High degree of variation in pricing both

within and across markets Larger for outpatient than inpatient 5 of the 13 markets are in Michigan which has

an unusually concentrated insurance market One insurer has 70% of market share Yet even here there is large variation

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Solutions? Reference Pricing

Payer sets a maximum amount for a specific procedure

Other “value based” insurance contracts “Nudge” consumer to high value providers –

similar to prescription drug formularies Return to selective contracting Regulation

All-Payer Model Price Transparency

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What We’ve Learned1) Dominance of Non-Profit – contract failure

most logical, although less likely to apply today

2) Non-profits competing goals of profit and utility maximization

3) Cost Shifting and Price Discrimination are two different things

4) How hospitals compete makes a difference

5) Trend in consolidation is a two-edged sword

6) Pricing??