Lecture 13 & 14 - 10/19/99 and 10/21/99

Hospitals

Iglehart Article

• Evolution of hospitals: originally almshouses
• Relatively high expense in U.S. v. other countries
• Shift from inpatient to ambulatory care
• Growth of physician-owned facilities
• Hospitals are labor-intensive (54%)
• High burden of uninsured and discounts
• Different incentives: MDs v. hospitals

Antitrust issues

Characteristics of Hospitals

• Vast majority of hospitals are not-for-profit
• Tripartite structure of hospitals
• Residual claimants
• Role of quality-how to measure
• Large share of total health care bill

Profit or Cash Flow Maximization

• Good as point of departure even though most hospitals are private not-for-profit

Now let quality vary

• R(Q,Y)-C(Q,Y)=profit, where Q=quality and Y=quantity
• Then P(Q,Y)Y-C(Q,Y)=profit
• Take derivatives with respect to (1)Q and (2)Y and set them to zero. Get two conditions: MR quality=MC quality and MR quantity=MC quantity
• Graphically, trying to find quantity-quality combination yielding largest rev.-cost diff.

Newhouse Utility-Quantity-Quality Model

Starts with these "stylzed" facts:

(1) tripartite organization of hospitals

(2) administration not judged by profit levels

(3) prestige influenced by size, but more than this by quality

(4) medical staf likes quality. Quality in part equated with excess capacity--easier to get one’s patients admitted if there is lot of capacity

How to Measure Quality?

• Personnel-patient ratio
• Facilities and services offered
• Credentials (certifications, affliliations)
• Patient outcomes, sucn as mortality rates, rates of rehospitalization for same condition as prior hosp., nosocomial infection rates, and process of care (chart reviews)

The Newhouse Model in Graphics

• Baseline demand and cost curve

• Derive quantity-quality frontier

Effects of Exogenous Changes

• Wage increase
• Increase in population share covered by insurance
• Increase in allowable deficit (say because of an increase in a public subsidy)

Pauly/Redisch’s Not-for-Profit Hospital as a Physicians’ Cooperative

• Not-for-profit most common organizational form
• Maximize collective of income of doctors in the community
• Trustees merely legimitize hospital actions

Equations

Maximization Problem

Graphs

Graphs Incorporating Physician Supply

Alternative Supply Scenarios

Imperfect Cooperation on the Hospital’s Medical Staff

• Individual MDs on staff have control over micro decisions
• At best, hospital can determine stock of inputs, but MDs control their use
• How imperfect cooperation works

Imperfect cooperation should increase as MD staff size increases

• When staff size is small, each MD bears a larger share of cost of his/her actions
• When staff size is small, departures from cooperative behavior more noticeable
• When staff size is small, mutually agreeable decisions are more likely to be reached
• Why don’t hospitals implement ways to reduce imperfect coooperation?

Why Pauly/Redisch Model is Interesting

• Explains closed staffing arrangements
• Integrates hospital and physician behavior
• Shows why physicians like the not-for-profit organizational form
• Explain why hospitals may not be efficient