Hospitals (L6)

Question 1

Hill-Burton Act

Answer 1

1946 - increased the number of hospitals in the US. Congress gave money to build hospitals (preference for rural areas) and to provide free or low-cost care for the poor and indigent. Resulted in more hospitals and more hospital beds

Question 2

Hospital-physician relationship

Answer 2

1. “Physicians workbench” - physicians not directly employed by hospital and the decision making power often rests with staff (creates a conflict between physicians who want high-tech equipment and administrators who want to keep costs low, but don’t have sufficient knowledge to know what equipment is necessary
2. direct employees
3. physician-owned hospitals

Question 3

positive volume-outcome correlation

Answer 3

surgical mortality rates decrease with increased hospital volume. This occurs due to:

1. Learning-by-doing hypothesis - high volume leads to good outcomes
2. Selective-referral hypothesis - good outcomes leads to high volume

Correlation is stronger with hospitals than individual physicians due to ALL aspects of surgery - preop, op, postop

Question 4

Perfect competition

Answer 4

assumptions: many firms, freedom of entry and exit (requires low sunk costs), all firms produce an identical or homogeneous product, all firms are price takers, there is perfect information and knowledge

Question 5

oligopolies

Answer 5

falls somewhere between perfectly competitive markets and monopolies, but causes the same problems that monopolies do (high prices and low output), but due to the presence of limited competition, these problems are not as severe

Question 6

Differentiated product oligopoly

Answer 6

strict barriers to entry and services provided by each firm are not perfect substitutes (hospital industry)

Question 7

Herfindahl-Hirschman Index

Answer 7

HHI = ∑ si2
si = market share for a firm
- If HHI is closer to 1, fewer firms in the market (highly concentrated)
- If HHI is closer to 0, large number of firms in the market

Question 8

Reasons for limited competition in hospital market

Answer 8

1. Barriers to entry
2. because of insurance, prices are not transparent and moral hazard for insured patients
3. government often sets prices
4. emergency nature of health care means that patients are unable to search for the “best” and “cheapest” hospital

Question 9

Medical arms race hypothesis

Answer 9

greater competition among hospitals for physicians can result in redundancy in and overconsumption of medical technologies. This can actually increase cost without improving quality.

Question 10

Nash Equilibrium

Answer 10

a stable state of a system involving the interaction of different participants; in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged

Question 11

Benefits of nonprofit status for hospitals

Answer 11

1. exempt from taxes

2. donors receive a tax deduction

Question 12

Costs of nonprofit status for hospitals

Answer 12

1. cannot sell stock
2. cannot distribute profit to owners
3. restricted to certain charitable activities

Question 13

non-distribution constraint

Answer 13

no one has a legal claim on the nonprofit’s residual, the difference between the revenues and its costs, or what an ordinary firm would call its profits.

Question 14

Government failure hypothesis for why nonprofits exist

Answer 14

market may fail to provide services to those in need to the level that some in community would value. Non-profits are a vehicle to organize capital and labor for those who demand more charity

Question 15

Altruistic-motive theory for why nonprofits exist

Answer 15

board of trustees want hospitals to succeed, but may also be concerned with quality and quantity of services beyond what would be purely profitable, particularly for the poor. Since they are not purely motivated by profit, they may choose to register as non-profit to reduce tax liability and attract donations

Question 16

Asymmetric Information/Contract failure for why nonprofits exist

Answer 16

Lack of trust that for-profit firms to use donations exclusively for charity and may trust non-profits more

Question 17

pure altruism

Answer 17

gain utility from the good being provided, regardless of source

Question 18

“warm glow”

Answer 18

an increase in utility from the act of giving

Question 19

non-excludable

Answer 19

people cannot be economically excluded from consuming the good even if they refuse to pay for it

Question 20

nonrival

Answer 20

one person can consume the good without depleting it for others

Question 21

non-profits are for-profits in disguise theory for why nonprofits exist

Answer 21

owners and employees are effectively shareholders who capture rents that would have been profits (profits are not stock dividends but higher wages or non-monetary benefits)