Health Economics- Lecture Ch14

8/3/2019 Health Economics- Lecture Ch14

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Hospitals and Long Term Care

Dr. Katherine Sauer

Metropolitan State College of Denver

Health Economics


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Chapter Outline:

I. Hospital BackgroundII. Hospital Utilization and Costs

III. Nursing Homes

IV. Hospice, Home Health, and Informal Care


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In 2005, there were 5,756 hospitals with close to 1million beds in the United States.

Of the 14.4 million persons employed at all health

service sites in 2006, 5.7 million were employed athospitals.

At the same time, the aging of the population has created

a major challenge for the adequate provision of long-term care.


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I. Background on Hospitals

A. 4 criteria for categorizing hospitals:

1. length of stay

short stay (less than 30 days)

long stay (more than 30 days)

2. type

community

teaching

mental

respiratory diseases

other specialties (ex: maternity)


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3. ownership

privatenon-profit

proprietary (for-profit)

publicfederal

state

county

local

4. size (number of beds)

[most short-stay facilities have


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primary care: preventative and non-hospitalized curative

secondary care: common surgical and medical procedures

in hospitals

tertiary care: most complex procedures(ex: open heart surgery, organ transplant)

Most community hospitals provide secondary care.


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B. History

Hospitals date back to ancient Egypt and Greece

In many countries, hospitals were organized by religious

groups.- illness associated with lack of faith

In the US, early hospitals were for the poor , mental

patients, and infectious diseases.- medicine practiced at home


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The modern US hospital came about at the turn of the

20th century.

- advances in antisepsis (help fight off infections)

improved surgical success

- advances in anesthesia, anatomy, physiology,

and invention of the X-ray machine

- rapid urbanization

- rising wealth, private insurance, workers comp

- Johns Hopkins (Baltimore, MD) 1885


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C. Organization

Nonprofit community hospitals are usually governed by

a board of trustees.- strong business background

Decision making power rests with the medical staff, not

the administrators or board.- the medical staff is made up of physicians who

are not hospital employees

- direct hospital resources

- not held directly accountable for resources- bill separately

- have admitting privileges at several

hospitals (attract patients)


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Increasingly, hospitals are moving to permanent physician-

employees.

- use HMOs to attract patients

- advertise

Many smaller hospitals have closed, or merged, orreorganized.

- deal with lower inpatient utilization

There is pressure to join networks of providers.

Many are focusing on outpatient care.


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D. Regulation and Accreditation

Hospitals are subject to state and federal regulations.

- quality

- costs

- reimbursement

They are licensed at the state level.

They have their own quality assurance programs.- 1971 PSROs (professional standards review orgs)

- 1984 PROs (peer review orgs)

- case-by-case reviews

-2002 QIOs (quality improvement orgs)


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II. Hospital Utilization and Costs

Hospital costs account for about 1/3 of NHE.

- increasing at a rate of about 10% per year


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A. Data


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Competition and Costs:

Usually, competition results in lower costs.

Some argue that hospitals may be an exception.

- medical arms race (MAR)


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game theory example:

Suppose there are two hospitals, each considering

adding a heart transplant unit.

Hospital B

Add unit Do not add unit

HospitalA

Add

unit

100

100

-50

200

Do

not

add

unit

200

-50

150

150


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Why doesnt competition drive down prices?

- reimbursement mechanisms

- retrospective

In recent years, hospitals have become more competitive.

Hospitals as well as insurance companies must compete

for their managed care business through price and quality.

Hospitals also are now reimbursed by many major third-party payers on a prospective basis at rates that are

independent of their actual costs.


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B. Empirical Evidence

Kessler and McClellan (2000)

Examined the effects of hospital competition on the

costs and outcomes for Medicare beneficiaries who

incurred heart attacks.Prior to 1991, competition improved outcomes

in some cases, but also raised costs.

After 1990, there were substantial decreases incosts and substantial improvements in outcomes.


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Zwanziger and Mooney (2005)

Studied HMOs in New York State which until 1996regulated the rates (determined largely by historical costs)

private insurers were required to pay for inpatient care.

After the 1996 reforms, HMOs were able to negotiatelower prices with hospitals that were located in more

competitive markets.


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Dranove and colleagues (2002)

Found that for the average market, the consolidation

between 1981 and 1994 attributable to managed carerepresented the equivalent of a decrease to 6.5 equal-

sized hospitals from 10.4 such hospitals.

Summary:


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C. Hospital Cost Shifting

For legal and ethical reasons, hospitals often provideuncompensated care.

- uninsured

- insured but dont pay their portion of bill

- restriction on reimbursement rates

- Medicare and Medicaid dont pay full bills

So, in reality are the costs shifted to the paying

customers?


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Private Patients Medicare Patients

PP

QQ*priv

P*priv

MC = AVC MC = AVC

R1

DMR

Qmed

R2

R = reimbursement


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In the short run, even if reimbursement falls, the hospital

wont raise prices for the private patients.

However, the hospitals profits are lower.- merge?

- close?

- pay less to employees?


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Empirical Evidence?

Morrisey (1995)Indicates that cost shifting through higher prices has

taken place but that it is far from complete.

One study included in his review shows that Californiahospitals reduced the amount of uncompensated care by

53 cents for every $1 decrease in their discounts to third

parties.

This would have been unnecessary if the hospitals could

have shifted the costs to others.


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Cleverly (1993)

Examined 160 community hospitals that closed between

1989 and 1991.

The analysis shows that high prices and lack of

investment in technology drive patients away.

With lower utilization, costs per patient increase and

cash flows become negative.

The deteriorating liquidity ultimately leads to closure.


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Succi and colleagues (1997)

Found that rural hospitals gain an advantage and reduce

the threat of competition by differentiating their services.

Those that offer more basic services and high-tech

services compared to the market average are less likely to

close.


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Jantzen and Loubeau (2000)

Found that price and hospital participation in networksare very important to managed care organizations in

awarding contracts.

Second, hospitals and hospital systems, through their sizeand partnerships, seek to counter the pricing pressure and

other demands that have been placed on them by

managed care organizations.


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Sprang et al. (2001)

There is some evidence that restructuring lowers costs.

Krishnan (2001)Evidence indicating that merged hospitals charge higher

fees than otherwise, especially when the merging

hospitals gain substantial market shares.


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Harrison (2007)

Using comprehensive national data covering the period

19811998 found that increased market power, rather

than improved efficiency, is the principal driving force

for consolidations.

Melnick and Keeler (2007)

Found that hospitals that were members of multihospital

systems increased their prices between 1999 and 2003 at

much higher rates than nonmembers.

Summary:


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D. Quality of Care

The public cares about quality!

Hospital quality is often understood in two ways.

The availability of high tech units and services is one

way to think about quality.

Quality can also be understood in terms of hospital

mortality and error rates, readmission rates, and the

rates at which a hospital meets established treatment

processes and protocols.


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Areas of Health Econ research:

1. relationship between size and quality

2. quality and cost (do you get what you pay for?)

3. type of ownership and quality

4. quality and Medicaid patients


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Empirical Evidence:

Williams et al., 2005Analysis of quarterly data for heart attacks, congestive

heart failure, and pneumonia

substantial gains in 15 of the 18 measures over the two-year study period.

The gains were greatest for hospitals that had been the

worst performers at the start of the evaluation period.


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Jha et al., 2005

examined 10 quality indicators and found mean

performance scores (representing proportions of patients

who satisfied the criteria) were89 percent for heart attacks

81 percent for congestive heart failure

71 percent for pneumonia

Summary:


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III. Nursing Homes

A. Background and Costs

The increase in the elderly populations has increased

interest in long-term care problems.

Traditionally, the elderly have been cared for until

death by families.

The first nursing homes in the US were the county

poorhouses established for those without families

(18th/19th century)


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Other state and local facilities evolved.

- some were sponsored by religious and fraternal

groups

Social Security Act of 1935 provided funds for patients in

private nursing homes.

Medicare and Medicaid we passed in 1965 and increasedboth the funding and the nursing industry.


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The growing nursing home population and the growing cost

of nursing homes is linked with Medicare and Medicaid.

Medicare covers those who are discharged from hospitals,

but require skilled nursing care to recover.

- historically Medicare reimbursed on a cost basis- Balanced Budget Act of 1997 mandated a shift to

prospective reimbursement [fixed per diem

payments determined by the category a person is

in]- shift the financial risk to the nursing home


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Medicaid pays for the long-term care of the poor (elderlyand non-elderly).

- covers skilled nursing care

- covers intermediate care

Medicare is administered by the state, but subject to

federal requirements.

- state eligibility requirements can vary

- state payment methods can vary


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B. Quality of Care

One would expect a positive association between size and

quality as a result of economies of scale and scope.

Daviss (1991)

Review of a large number of studies, suggests that no

clear relationship exists.


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C. Relationship Between Type of Ownership and Quality

Analysts have not been able to detect an unambiguous

positive relationship between quality and costs.

- so, expect that they would have difficulty in

detecting any relationship between type of

ownership and process or outcome measures of

quality.

Daviss review confirms this conclusion.


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D. Medicaid Patients and Quality of Care

Expenditures per resident are lower in homes with

higher proportions of Medicaid patients.

- negative relationship between quality and the

proportion of Medicaid residents in a nursing

home

Troyer (2004)

found that Medicaid resident mortality rates were 4.2

percent and 7.8 percent higher than those for private-

pay residents after one and two years, respectively.


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E. Excess Demand

For years the industry has been characterized as having

excess demand.

Economists are intrigued/skeptical of persistent shortages

of any commodity.


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A nursing home admits private (self-paying or

insurance) patients and Medicaid patients.

P

P1

R1

MC = AVC

DMR

Q1 Qcapicity Q

Admit private patientswhere MR exceeds R.

(Q1)

They will pay p1.

Suppose there are Qm

Medicare patients

wanting admission.

A number of them

wont get in.

Qm


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Medicare raises the reimbursement rate:

P

P2

P1

R2

R1

MC = AVC

DMR

Q2Q1 Qcapicity Q

Find where R2 > MR .

Admit Q2 privatepatients.

They will pay p2.

There are still Qm

Medicare patients

wanting admission.

A smaller number of

them wont get in.

Qm


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F. Financing Long-Term Care

Patients must meet income and asset requirements to beeligible for Medicaid nursing home benefits.

- spend a lifetime paying into taxes and then

must spend down to qualify for Medicaid

There are a variety of proposals to allow individuals to

have higher incomes and still be eligible for care.

Federal policy centers on two strategies:- encourage home care

- encourage private LTC coverage


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IV. Hospice, Home Health, and Informal Care

The budgetary pressure of caring for the growing elderlypopulation in hospitals and nursing homes has promoted

interest in other less costly arrangements.

Hospice and home health programs are perceived to becost effective and are heavily funded at the federal level.

Hospice care:

- for the terminally ill- care in their own homes

- improved quality of life in final days

- death with dignity


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Most hospice patients receive care in their own homes,

but the use of special facilities is becoming more

prevalent.

In hospice, an interdisciplinary team of health

professionals provides individualized care.

- emphasizes patients physical and emotional

comfort (i.e., palliative as opposed to curative

care)

- support for family members

Medicare introduced hospice benefits in 1983.


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Home health care (larger and more important program)

provides care to patients with acute and long-term needs.

disabilities

recuperating from a hospital stay

the terminally ill

The rationale for public funding for home health care rests

on the premise that it is much less expensive than either

hospital or nursing home care.


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Benefit was included in initial Medicare legislation in1965.

- 1973 extended to certain disabled people under 65

HHC is one of the fastest growing components of totalspending.

BBA legislation in 1997 moved reimbursement from cost-

based to prospective.


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Concluding Thoughts:

Common perceptions of complete cost shifting do not

accurately represent how hospital markets function.

There are significant deficiencies in the quality of

hospital care, and improving quality is one of this

nations most important goals.


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In the long-term care sector, we focused on nursinghomes, emphasizing three issues:

quality, especially for Medicaid patients

shortages

financing nursing home care

Home health care is a less costly alternative to nursing

home care and represents one of the fastest-growing

components of health care spending.


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Discussion Questions:

1. Explain why it is often claimed that hospitals competefor doctors rather than patients.What are some of the

implications of this phenomenon, assuming that it is

true?

2. Explain why only about 5% of adults buy long-term

care coverage.

3. Explain how excess demand for nursing home bedsmay persist over long periods. How can the hypothesis

be tested?


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4. Informal care provided by children and other familymembers are good substitutes for Long Term Care for

parents. Describe some potential social and

demographic changes that may reduce the availability of

such informal care. Develop policies that may help takeadvantage of the substitutability to delay entry of the

elderly into Long Term Facilities.

Health Economics- Lecture Ch14

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