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Market for Hospital Services

Market for Hospital Services. Outline. Hospital Industry Structure Hospital Conduct Industry Performance. Hospital Industry Structure. Is the hospital market competitive? Competitiveness depends on: number of hospitals barriers to entry demand/ number of buyers

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Market for Hospital Services

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  1. Market for Hospital Services

  2. Outline • Hospital Industry Structure • Hospital Conduct • Industry Performance

  3. 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)

  4. U.S. Institutional Setting • Hospital classification • Community hospitals • Physician-owned specialty hospitals • Teaching hospitals • Private for profit, private not-for-profit, public not-for-profit

  5. Community Hospital Characteristics1970-2007

  6. Community Hospitals by Ownership Type

  7. Size Distribution of Community Hospitals

  8. Hospital Industry Structure • # of hospitals declined 17% • # of beds declined 15% • Median size: 150 beds • Short-term stays (< 7 days) • Outpatient visits up dramatically • Nonprofit 60% • For-profit 18% • State & Local 22%

  9. Area Hospitals

  10. 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 175-200 beds • Multi-hospital system • Learning By Doing • Over time, higher cumulative output, more experience leads to lower costs, higher quality.

  11. Mergers • Horizontal: merger of firms in same market • Exploit EOS • Reduce administrative costs • Improve customer access to information • Vertical: mergers of firms in upstream and/or downstream markets • Advantages • Solves the agency problem • Lowers transactions costs • Ensures supply of input • Disadvantages • Monopoly power Insurers & hospitals (Allina) Insurers & physicians (Kaiser) Physicians & hospitals (PHO)

  12. 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 don’t 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

  13. 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

  14. Models of Hospital Behavior • Profit Maximization • Utility maximizing models • Physician-control models

  15. Hospital Income Flows

  16. Pricing Practices in Medicine

  17. Hospital Expenses by Ownership Type

  18. Hospital Price Inflation in the US

  19. Pricing Practices in Medicine Price discrimination Cost shifting From Medicare patients to private patients

  20. Charges and discounts for diagnostic bilateral mammogram

  21. Pricing Practices in Medicine Price discrimination Cost shifting From Medicare patients to private patients Problem Set #6

  22. Market for Pharmaceuticals

  23. Pharmaceutical Industry • Pharmaceuticals account for 12% of healthcare spending • Drug companies spend 14% of revenues on R&D • Industry Structure • Basic research--supported by NIH labs and grants to universities • Applied research--development of marketable drugs • 284 new drug approvals from 1990-99: • 265 from industry • 9 from government • 10 from academia

  24. The World's Top-Selling Drugs, 2008 http://pharmexec.findpharma.com/pharmexec/Special+Reports/2009-PharmExec-Top-50/ArticleStandard/Article/detail/597526

  25. Top 10 Global Pharmaceutical Companies

  26. R&D Process in Pharmaceuticals • Kefauver-Harris Amendment (1962) • Thalidomide scare (1957-61) • Established safety and efficacy standard • Drug advertising must disclose side effects • R&D Process • $55 billion spent by US pharma in 2006 • DiMasi et al. (2003): average out-of-pocket cost for a new approved drug is $403m (and fully capitalized cost is $802m)

  27. R&D Process

  28. New Drugs Introduced into the US Market 1940-1990

  29. Is the FDA too Risk Averse? Two Types of Error in FDA Approval Decision Victims are identifiable and traceable, and might appear on Oprah.Error is self-correcting Victims are not identifiable and scarcely even acknowledged in the abstract. Error is not self-correcting

  30. Regulating Drug Prices • The economics of drug pricing • High fixed costs; low marginal costs • Problem Set #12 • Price controls in the U.S. and abroad • Danzon (1996): role of generics • Impact of price controls on new drug development?

  31. R&D vs. Promotion Spending Source: R&D Spending: Pharmaceutical Research and Manufacturers of America, PhRMA Annual Membership Survey, 2004. Promotional Data: IMS Health, Integrated Promotional Services™ and CMR, 6/2004

  32. Benefits of Pharmaceuticals

  33. New Medicines Account for 40% of Increase in Life Expectancy Increase in Longevity due to NCE launches Total Increase in Longevity Source: F.R. Lichtenberg, “The Impact of New Drug Launches on Longevity: Evidence from Longitudinal, Disease-Level Data from 52 Countries, 1982-2001,” NBER: June 2003.

  34. New Drugs Reduce Visits to Hospital and ER: Asthma Management Program Improves Outcomes for Children with Asthma Source: P.J. Munzenberger and R.Z. Vinuya, “Impact of an Asthma Program on the Quality of Life of Children in an Urban Setting,” Pharmacotherapy, 22 (2002).

  35. Cost of Drug Therapy vs Surgery

  36. Confounding Factors • Lifestyle • Age • Legal issues • Technology HC Expenditures = P * Q • Pricing • Intensity of use

  37. AIDS STDs Teenage pregnancies Alcohol abuse Cigarette smoking Drug Use Obesity Lifestyle Effects due to failure in economic system in providing sufficient income earning opportunities Liberal perspective: due to breakdown of traditional family values with government as a contributor Conservative perspective:

  38. AIDS Cases in the U.S. Cases have stabilized at 36,000 annual cases

  39. AIDS by Exposure Category

  40. AIDS in America Extent of AIDS Worldwide: 36-40m living with HIV; 22m deaths United States: 1m cases; 400,000+ deaths Medical care issues Hellinger (1992): lifetime costs of $70,000 Cocktail Protease inhibitors: $7400/yr AZT: $3500/yr 3TC: $2800/yr $12,000 - $16,000 pppy $16,000 x 750,000 = $12 billion

  41. Drug Abuse • Extent of Drug Use • Cost to society • Intervention strategies

  42. Use of selected substances in the past month, by age, 2007 Source: Health United States, 2009: With Chartbook on Trends in the Health of Americans, 2009, Table 63.

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