Healthcare Economics

Section 1

CHAPTER 13 (Santerre and Neun, 2006)
Please optionally answer only to 3 questions.

1. Explain how the relevant product market is typically defined for community hospitals. Why? How is the relevant geographical market defined? Why?
2. Assume there are ten equally sized hospitals in a market area. Calculate the Herfindahl-Hirschman index. Two hospitals in the market area inform the Department of Justice that they wish to merge. According to the current DOJ merger guidelines, will the merger by contested? Explain.
3. What are some possible sources of barriers to entry into the hospital industry? What has the literature concluded about the severity of these barriers?
4. Explain how you might design a statistical test to examine the presence of a certificate-of-need law on hospital care expenditures. What would be your main hypothesis in this experiment? What would be the unit of analysis in your experiment? What variables would you specify on the right-hand side of the estimation equation to act as control variables? What would be your identification strategy to eliminate any concerns about reverse causation or a third variable affecting both the presence of a CON law and hospital care expenditures?
5. In Chapters 11 and 12, survivor analysis was discussed as a test to determine if larger-sized hospitals are more efficient at producing services than smaller-sized ones. If you were to use national data for hospitals based on bed size, discuss how you would set up the experiment to perform this survivor test for the hospital services industry. Now go to your library and locate various issues of Hospital Statistics, which is published by the American Hospital Association and use actual data to complete the analysis. Are larger-sized hospitals more efficient? Explain.
6. According to the text, empirical studies have not uncovered any strong evidence to indicate that cost savings result from a hospital belonging to a multihospital system. Yet, hospitals continue to consolidate and form multihospital systems. Why do you suppose that is the case?

7. Equation 13–3 in the text shows the Dorfman-Steiner condition for the optimal amount of advertising intensity for a monopoly. For a few nonteaching and teaching hospitals in your community, see if you can find data on advertising expenditures, revenues, and the accounting operating margin (i.e., net income/ revenues). Is it true that more profitable hospitals advertise more? Now use Equation 13–3 and those figures to impute the advertising elasticity of demand for those particular hospitals. Does a nonteaching or teaching hospital face a higher advertising elasticity?

8. Given the not-for-profit nature of most hospitals in the United States, do you think advertising and other types of promotion expenditures are warranted from a societal perspective? Explain.
If hospitals rely more on nonprice methods of competition, like advertising, quality, and convenience, hospital prices may become relatively rigid. The net effect of this trend on consumer welfare is uncertain and depends on a variety of considerations, including whether the nonprice methods promote real or illusory gains for consumers.
9. Your roommate is working on a paper for a medical sociology class. You are asked by her if the typical hospital in the United States possesses any market power. How would you respond? Use theory and empirical evidence to support your argument.
Most hospital markets are local in nature and tend to be concentrated. Entry into the hospital industry may be difficult due to the extent of technological specifications required. In addition to high sunk costs, other cost conditions, such as scale economies, learning curve effects, and system affiliation, may serve as barriers to entry.
10. Suppose 15 years from now you find yourself running a nonprofit hospital (apparently not a bad gig according to some of our former students). You make all of the major decisions for the hospital but must reach agreement with your board of directors for most of them. But, of course, you appointed most of them to their positions so the disagreement will likely be minimal. What would be your main goal or goals in running that nonprofit hospital? For example, would you request more pay for yourself or your staff, larger offices, or the acquiring of other hospitals? Could your decisions be construed as contrasting with (social) efficiency?
11. A study by Mark (1996) finds that not-for-profit psychiatric hospitals are no more efficient than their for-profit counterparts after controlling for quality. At the same time, the study finds that not-for-profit psychiatric hospitals provided a higher quality of care as measured by the number of violations and complaints received. Use the quality/quantity maximization model to explain these results.
12. Some economists have suggested that the best way to control medical costs is to remove the profit incentive for health care providers, particularly hospitals. This would involve making all hospitals not-for-profit institutions. Use the utility maximization model to explain the likely impact such a policy would have on the cost of producing hospital services. What would happen if instead a policy was instituted that reduced barriers to entry in the hospital sector and therefore made the market more competitive?

13. Suppose a state attorney challenges the tax-exempt status of ACME Hospital because of a disagreement over the amount of charitable care the hospital has been providing. The attorney general claims that the hospital provided only $25.9 million in charity care over the last five years. Using a much broader definition of charity care that included items that were not reimbursed, such as the costs of community service programs and education, ACME claimed it had provided $191.9 million of charity care over that same period. In addition, ACME was criticized for adding an extravagant, nine-story building called the Wile E. Coyote Tower that included a spacious, two-story lobby, a health club, and a gourmet restaurant. Use the economic theory developed in this chapter to put the debate between the attorney general and ACME in a broader context.

14. Studies using data prior to 1983 found that increased hospital competition led to higher hospital prices. How do researchers explain that result? What have more recent studies concluded about the relation between competition and prices in the hospital industry? Why has this change occurred?
15. Explain the theoretical reasoning why economists suspect that hospitals with different ownership forms will behave differently with respect to price, quality, and access. Also, explain some of the reasons why most empirical studies have not found any significant differences between for-profit and not-for-profit hospitals with regards to their performance.
16. Given that empirical studies find that both HMOs and state rate-review programs have been relatively successful at containing costs, would you prefer more managed care competition or a single-payer system? Explain your choice.
17. You learned in this chapter that hospitals expenditures continue to grow and the hospital services price inflation exceeds that of the general price inflation rate. Do you think these increases resulted from imperfections in the hospital services market such as a nonprofit motivation, insurance coverage, CON laws, etc. or because of the normal functioning of supply and demand? Explain.
18. What does cost shifting involve? Why do many economists suspect that cost shifting may not occur in practice? Theoretically, what conditions are necessary for hospitals to practice cost shifting?
19. Explain would you conduct a study to determine if hospitals produce flat-of-the-curve medicine? Does the discussion surrounding Figure 13–7 refer to flat-of-the-curve medicine? Why or why not?
20. Go to the March 2011 MedPAC report to Congress at the following site and learn more about the characteristics of hospitals treating Medicare patients in the United States: http://www.medpac.gov/chapters/Mar11_Ch03.pdf. Also visit the American
Hospital Trend Chartbook to learn about various trends concerning and affecting community hospitals: http://www.aha.org/research/reports/tw/chartbook/index.shtml.

Section 2

1. Describe three benefits associated with pharmaceutical products.

2. What is the economic rationale behind a patent?
3. Why might the FDA tend to delay the drug approval process? Explain in terms of type 1 and type 2 errors.

4. Physician assistants have long argued that they have the ability to provide as much as 70 percent of the medical services provided by primary care physicians at a much lower cost. Yet government regulations limit their ability to work independently of physicians. Explain what would happen to the level of competition in the physician services market if all the statues limiting the activities of physician assistants were eliminated.
5. Discuss the theoretical issues surrounding the supplier-induced demand theory.

6. Who is the largest buyer of hospital services?
Section 3
1. We have learned that production efficiency is achieved when society is receiving the maximum amount of output from its limited resources. Explain how cost-benefit analysis can be utilized to achieve that outcome.

2. In your own words describe the difference between cost-benefit and cost-effectiveness analysis.
3. You have just been hired by your city’s department of health. Your first task is to use cost-benefit analysis to evaluate a smoking awareness program that the department has been promoting for two years. Under the smoking awareness program, the department of health sends a team of health care professionals to various private firms free of charge to lecture to employees about the risks of smoking. The lecture takes one hour and is given during the work day. Describe the costs and benefits you should consider in your analysis.