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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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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 • types of services/technology • asymmetric information (patients & hospitals)
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
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%
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.
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)
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
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
Models of Hospital Behavior • Profit Maximization • Utility maximizing models • Physician-control models
Pricing Practices in Medicine Price discrimination Cost shifting From Medicare patients to private patients
Pricing Practices in Medicine Price discrimination Cost shifting From Medicare patients to private patients Problem Set #6
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
The World's Top-Selling Drugs, 2008 http://pharmexec.findpharma.com/pharmexec/Special+Reports/2009-PharmExec-Top-50/ArticleStandard/Article/detail/597526
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)
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
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?
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
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.
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).
Confounding Factors • Lifestyle • Age • Legal issues • Technology HC Expenditures = P * Q • Pricing • Intensity of use
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:
AIDS Cases in the U.S. Cases have stabilized at 36,000 annual cases
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
Drug Abuse • Extent of Drug Use • Cost to society • Intervention strategies
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.