Hospitals (part 2)

1. Hospitals(part 2)

2. Outline • Why is Non-Profit Dominant? • What is their Objective? • Cost Shifting vs. Price Discrimination • How do Hospitals Compete? • Consolidation • Pricing

3. 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?

4. 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

6. 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

7. 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

8. 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

9. Hospital FinancingPayment-to-cost ratio

11. 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

12. 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.

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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.

19. Provider Consolidation • Consolidation Trends in the 1990s

20. Provider Consolidation • Rise of Local Hospital Systems

21. An New Wave

22. 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.

23. 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

24. 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

25. 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

26. Provider Consolidation • Horizontal Consolidation • Hospital to hospital • Vertical Consolidation • Hospital to physician practice • Hospital to long-term care • Hospital/physician group to payer

27. 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

28. Reasons for Consolidation • “Hospitals with private rates below 160 percent of Medicare will have difficulty” Journal of Healthcare Management

29. 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

30. 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

31. 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

32. Hospital Pricing

33. Hospital Pricing

34. 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

35. Hospital Pricing

36. Hospital Pricing

37. 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

38. 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

39. What We’ve Learned • Dominance of Non-Profit – contract failure most logical, although less likely to apply today • Non-profits competing goals of profit and utility maximization • Cost Shifting and Price Discrimination are two different things • How hospitals compete makes a difference • Trend in consolidation is a two-edged sword • Pricing??