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The Hospital Market, Part 2. Professor Vivian Ho Health Economics Fall 2007. Structure: Putting it all Together. Is the hospital market competitive, or not? Case Study : UNITED STATES OF AMERICA, Plaintiff, vs. MERCY HEALTH SERVICES and FINLEY TRI-STATES HEALTH GROUP, INC. Defendants.

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The hospital market part 2

The Hospital Market, Part 2

Professor Vivian Ho

Health Economics

Fall 2007


Structure putting it all together
Structure: Putting it all Together

Is the hospital market competitive, or not?

Case Study:

UNITED STATES OF AMERICA, Plaintiff, vs. MERCY HEALTH SERVICES and FINLEY TRI-STATES HEALTH GROUP, INC. Defendants.


Filed October 17, 1995

  • Mercy and Finley: only 2 acute care hospitals in Dubuque, Iowa propose to merge.

  • Justice Department sues for preliminary injunction.


Facts

Dubuque population = 86,403

Mercy: 320 staffed beds, average daily census = 127.

Finley: 124 staffed beds, average daily census = 63.


competition - outside 70m radius, but within 100 m.

Madison, Wisconsin

Waterloo

Cedar Rapids

Dubuque

Freeport, Illinois

Iowa City, Iowa



Justice Department case

1) Where do Dubuque patients go for hospital care?

88% inside (Mercy or Finley)

12% outside

2) Where are Mercy/Finley patients from?

76% inside (Dubuque)

24% outside

  • Dubuque the relevant geographic market, and merger constitutes a monopoly.


Ruling

  • District court judge rejects Justice Department’s definition of geographic market as too narrow.

    • “The government continues to fail to look at the merger within the context of current market trends. All evidence is that there is a great deal of competition for health care dollars…”


  • “…if DRHS [merged entity] reacted in a noncompetitive manner, an HMO that could successfully induce Dubuque area residents to use alternative hospitals would be at a significant cost advantage.”

  • “There is also evidence that managed care entities can successfully induce Dubuque residents to use other regional hospitals for their inpatient needs.”

    Merger of Mercy and Finley would not/could not result in higher prices.


Case study conclusion
Case Study Conclusion manner, an HMO that could successfully induce Dubuque area residents to use alternative hospitals would be at a significant cost advantage.”

  • Even if only one hospital exists in a given geographic region, it may not be able to act as a monopolist

  • Ability of large, managed care buyers to shift patients can keep the market competitive.


Hospital advertising
Hospital Advertising manner, an HMO that could successfully induce Dubuque area residents to use alternative hospitals would be at a significant cost advantage.”

  • % of hospitals that advertise rose from 36% in 1995 to 50% in 1998.

  • We often see ads for local hospitals in newspapers and magazines.

  • Why?


Dorfman steiner model of advertising
Dorfman-Steiner model of advertising manner, an HMO that could successfully induce Dubuque area residents to use alternative hospitals would be at a significant cost advantage.”

  • The profit-maximizing amount of advertising occurs where:

  • If Ea equals .2, then 1% ↑ in advertising → .2% ↑ in demand.

  • And if EP equals 4, then Ea / EP 0.05

    • To max profits, hospital should spend 5% of total revenues on advertising.


Hospital will spend more on advertising when: manner, an HMO that could successfully induce Dubuque area residents to use alternative hospitals would be at a significant cost advantage.”

  • Ea is higher.

  • EP is lower.

    • ↑ advertising costs $.  But when demand is less elastic with respect to price, these costs can be passed onto the consumer.

    • Hospitals with greater market power will advertise more aggressively.


What type of advertising will hospitals use
What type of advertising will manner, an HMO that could successfully induce Dubuque area residents to use alternative hospitals would be at a significant cost advantage.”hospitals use?

  • Advertising the availability of services that all hospitals have may ↑market size, but not your own patient base.

  • Hospitals will use advertising to differentiate their product.

    • Hospital rankings.

    • Luxury services.


Hospital conduct
Hospital Conduct manner, an HMO that could successfully induce Dubuque area residents to use alternative hospitals would be at a significant cost advantage.”

  • Large #s of sellers and low barriers to entry promote competition.

  • We expect increased competition to lead to:

    • Higher output and quality.

    • Lower price.


  • However, the hospital market has important differences. manner, an HMO that could successfully induce Dubuque area residents to use alternative hospitals would be at a significant cost advantage.”

    • Hospitals don’t necessarily maximize profits.

    • Government is a major payer

      • Prices not set competitively.

    • Consumer less likely to shop around.

      • Insurance and asymmetric info.

  • Is hospital market competition good or bad for consumers?


  • Markets with fewer hospitals may face higher prices. manner, an HMO that could successfully induce Dubuque area residents to use alternative hospitals would be at a significant cost advantage.”

    • But hospitals in more concentrated markets may be larger, and econ of scale may ¯ costs.

  • Look at price and quality effects of hospital mergers.


  • Hospitals that merged between 1989 and 1996 lowered their costs two years after consolidation relative to comparable hospitals that didn’t merge

    • (Dranove & Lindrooth 2003)

  • Even if hospitals lower costs, they may not pass price savings on to consumers.

    • Hospitals that merged in 1997-2001 raised their negotiated PPO prices relative to the median market price.



  • Does ownership type affect conduct
    Does Ownership Type Affect Conduct? improve the quality of care.

    • Empirical Evidence

      • Prices higher for for-profit hospitals, but NFP & public hospitals enjoy tax advantages, municipal bond discounts.

      • Only small differences in costs by ownership type.



    Has managed care changed conduct
    Has managed care changed conduct? improve the quality of care.

    • Empirical Evidence

      • HMO hospitalization rates 15-20% lower than those of fee-for-service insurance plans.

      • However, HMO growth has not led to decrease in total hospital costs per capita at market level.


  • Outcomes for patients covered by HMOs similar & sometimes better than those for fee-for-service patients.


  • Hospital market performance
    Hospital Market Performance improve the quality of care.

    How have price and quantity changed?


    Source: U.S. Department of Labor, Bureau of Labor Statistics, CPI Detailed Report (various issues).



    What about quantity
    What about Quantity? year.

    • . Average length of stay declined, and admissions and occupancy rates declined through the 1990’s.

    • 2. But staffing, outpatient visits rose.

    Source: American Hospital Association, Hospital Statistics


    Was growth in staffing outpatient visits inappropriate

    Was growth in staffing, outpatient visits inappropriate? year.

    Ratings of inappropriate use of 3 medical treatments among 1981 Medicare population, as defined by expert panel of MDs.

    Procedure Inappropriate use(%)

    coronary angiography 17%

    carotid endarterectomy 32%

    upper GI tract endoscopy 17%



    Source: Marc L. Berk and Alan C. Monheit, “The Concentration of Health Expenditures: An Update,” Health Affairs 20 (Spring 2001), Exhibit 1.


    • Distribution of health expenditures has become more concentrated.

    • Most severely ill patients receiving high-cost critical care in hospitals.

    • 1/7 of all health expenditures spent on those in last 6 months of life.

      • Do we need to ration health care costs for the very ill?


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