Lecture 17 - 11/2/99

Effects of Admission to a Teaching Hospital on the Cost and Quality of Care for Medicare Beneficiaries

Taylor et al.

Research Questions

• How do teaching hospitals compare with nonteaching hospitals on cost and outcomes?
• How do nonteaching hospitals with different ownership forms compare on the same dimensions?

Methods

• Differences this study & Keeler et al.
• Diseases: hip fracture, congestive heart failure, coronary heart disease, stroke
• Followed patients from as early as 1984 through as late as year-end 1995
• Computed Medicare payments for the first 6 month following admission & survival
• Used  regression analysis to control for other factors

Results

• Discuss tables

Discussion

• Data base had longer followup and allowed us to control for health status  before index and comorbidities at time of index admission
• Many demographic and health characteristics had stat. sig. effects
• Subsidies teaching hospitals get v. differential outcomes

                                                           Frank Sloan
 
 

Why NFT Dominant Hospital Industry

• Transaction cost (costs of monitoring)
• Fiduciary relationship
• Public goods
• Implicit subsidies
• Inertia
• Cartel theory
• Which rationale fits best?

Legal Distinctions Among Ownership Forms

• Distribution of accounting profit
• Government-conferred competitive advantages: taxes, bond-financing, donations
• Election of board of directors
• Roles of NFP boards--private inurement bans
• Public hospitals

Property Rights Theory

• What it is
• Evidence from other sectors
• Argument against: (1) can achieve social objective better if it is efficient (2) inefficient firms targets for acquisition

Empirical Evidence on Effect of Ownership on Hospital Performance

• Cost
• Profitability
• Pricing and cost-shifting
• Uncompensated care
• Diffusion of technology
• Quality of care
• Hospital capital funds and investment

Cost

• Cost may vary by ownership because of:

• Competitive advantages
• Community benefits
• Teaching and/or research
• Slack
• Quality
• Input prices
• Casemix severity

• Cost issue: Does hospital ownership affect hospital efficiency?
• Why this might be so? Property rights theory
• Distinction between accounting cost and economic cost
• Methodological approaches:

• Paired-comparisons
• Regression analysis
• Frontier production function

• Overall, empirical evidence does not demonstrate that for-profit hospitals are more efficient. Students read specifics

Hospital Pricing Patterns: Cost-Shifting in Face of Demand Shifts

• NFP may not maximize profits. FP should maximize profits
• Dranove result using data from NFP hospitals in IL, before and after change in Medicaid price: $ drop in hospital profits from government sources leads to 51c increase in price per private admission
• Some other evidence does not support this finding

Hospital Pricing Following Hospital Mergers

• Theory: Scale economies v. increased market power to set price
• Motive may be to increase profit to increase cross subsidies
• Lynk (1995): When NFPs merged, price fell. When others merged, price rose
• Policy implications?

Uncompensated Care

• Uncompensated care: charity care + bad debt
• In 1994, uncompensated care as % of revenue:

• 4.5% for NFPs
• 4% for FPs
• Psychiatric hospitals less favorable to FPs

• When FP and NFP hospitals in same area, serve equivalent number of uninsured patients, but FP hospitals more frequently locate in areas where better-insured persons live (Norton & Staiger 1994)

Diffusion of Technology

• Generally no differences in rate of adoption by FPs and NFPs
• For psychiatric hospitals, when FP hospitals faced competition, tended to adopt innovative services earlier (treatment of eating disorders, substance abuse, geriatric services, and adolescents). No corresponding effect of increased competition on NFP adoption rates

Quality of Care

• NFP hospitals may use profit to subsidize quality (e.g., Newhouse model)
• FP hospitals do have lower staffing, especially RN staffing
• Keeler et al. results
• Shortell and Hughes: no difference in quality measured by mortality; Hartz et al. mortality higher for FPs
• Mark (1996) measured violations and complaints reported to Medicare and Medicaid programs
• For FPs, as compensation up, violations up
• For NFPs, as competition up, violations down. But Schlesinger et al. (1997) found that as competition increased, difference between uncompensated care rates of FPs v. NFPs down

Hospital Capital Funds and Investment

• What they are
• Cost of capital
• Capital structure
• Key investment finding
• Cost of capital and NFP market share

Bottom Line: Is there a dime’s worth of difference between NFPs and FPs?

• Findings
• On going debate
• Relevance on ownership conversion decisions
• Research on topic here at Duke

Alternative Theories of Regulation

• Public interest school--agencies established to protect consumers against monopoly power, inadequate information, etc.
• Capture theory of regulation--regulation initially well-intentioned, but eventually agency captured by the parties it regulates
• Interest group theories--regulation "sold" by public officials and "bought" by regulated

Pros and Cons of Alternative Theories of Regulation

• Public interest cannot explain regulation in nominally competitive industries, e.g., taxicabs, airlines, trucking; if pricing set at competitive level by regulators, why do outs want in?
• Capture theory explains persistence of regulation in some sectors, e.g., hospitals
• Various groups "buy" regulation which is "sold" in political process

Arguments for Regulation in the Health Field*
 
 
 

	Entry Regulation (CON; health planning)	Rate-revenue Regulation	Utilization Review
Control monopoly	NA	NA	NA
Power	NA	NA	NA
Rent control	NA	NA	NA
Spillovers	NA	NA	NA
Correct inadequate information	No	No	No
Excessive competition	Yes (duplication)	Yes	No
Moral hazard	Yes	Yes	Yes
Rationalization	Yes	Yes	No
Supply failures	NA	NA	NA
Unequal bargaining power	NA	NA	NA

 

NA = not applicable to health (hospitals)

* Especially hospitals

Classification system due to Richard Breyer.
 
 

Rationale for Certificate of Need

• rationalize industry--cottage industry-->planning and coordination (Hill-Burton)
• complete insurance coverage-->moral hazard
• cost-based (or charge-based) reimbursement-->excessive duplication of facilities and services (medical arms race argument)
• redistribute services 

Characteristics of Certificate of Need Laws

• operated by states
• require certificate of need to build or change major service
• applies to hospitals, nursing homes, home health (in some states)
• Federal law required states to adopt 1974-86
• Since then, some states have dropped CON

Structural Flaws of CON

• CON is reactive: planning agency does not initiate projects; agency has no capital budget (contrast with Germany); with few exceptions, no power to decertify
• Scientific basis for planning is weak: how do outcomes differ when have 3.8 v. 4.2 beds per 1,000 pop.? no basis for determining effect of CT availability (example of lack of basis for specialized equipment)
• Incomplete coverage-->inefficiencies in input mix
• Lack of budget: no compelling reason to say "no" to project
• Gives de facto franchise to "ins"-->impedes innovation
• Grandfather clauses stimulated investment
• Does not change hospital incentives

Consequences of CON Laws

• Some reduction in bed supply
• Some increase in investment per bed
• No effect on diffusion of technologies
• No overall effect on hospital expenditures per capita population
• Results for nursing homes more favorable: why?