Hospitals and Long-term Care 1. Background and overview of hospitals 2. Hospital utilization and costs 3. Nursing Homes 4. Hospice and Home Health
Background and Overview of Hospitals • (1) (2) (3) (4) The type of hospitals can be classified by the four criteria: The length of stay: short stay (less than 30 days) or long term (more than 30 days) Type: community hospitals, teaching hospital, mental hospital Ownership: private or public (federal, state, county, or local) Size: measured by number of beds (=200).
organization • The type of community hospitals is governed by a board of trustees that selects the president that approves most major decisions. • The hospital’s decision-making power rests with the medical staff rather than the administrators of the board. As usual, the hospital has been referred to as the physician’s “rent-free workshop” where physician can direct substantial resources for patient care but is not held directly accountable for those resources. • More hospitals now rely on permanent physicianemployee who are paid salaries. Besides, with introduction of HMOs, these staff physicians are no longer the driving force to admit patients • The hospital industry faces a period of rapid change such as declining inpatient utilization. Many smaller hospitals have closed while others have merged or reorganized.
Regulation and Accreditation • Professional Standards Review Organization (PSROs) were established in 1971 to monitor quality. • PSROs were replaced by peer review organization (PROs). The Centers for Medicare and Medicaid Services (CMS) awarded contracts to the PROs to perform case-by-case peer review and to monitor Medicare utilization in hospitals. • Hospitals are also subjects to regulations about reimbursement, such as Medicare’s prospective payment system (PPS). Certificate-of-need (CON) laws limit capital spending, and hospitals are subject to antitrust laws intended to promote competition. • Hospitals seeking accreditation are evaluated by a visiting team, which examines hospital with JCAHO (Joint Commission on the Accreditation of Healthcare Organization). Many third-party payers reimburse only for care provided in accredited hospitals
Hospital Utilization and Costs • Competition and costs: Q: Is hospital competition inefficient and has it led to an unproductive and costly medical arms race (MAR)? A: (1)Traditional Wisdom declare: With the exception of a natural monopolies resulting from economies of scale, evidence is substantial that higher level of seller concentration leads to higher price and reduced choices. Unlike other industries, where sellers must compete on the basis of price, third parties reimbursed hospitals on a retrospective cost basis. Higher cost generally means high payments. (2) Now the situation has changed. Hospitals and 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. It would appear that hospitals have a strong financial stake in being efficient.
Evidences for MAR hypothesis • Dranove and colleagues (1992) developed and estimated a theoretical model of he number of specialized hospitals services in a market. They found that increasing competition increases the number of services offered, but MAR effect is dominated by economics of scale and scope, as well as other demand supply consideration.
Hospital Cost Shifting • Many third-party payer place stringent limits on reimbursement rates, and proposals to reduce Medicare and Medicaid expenditures typically for call for further deduction. In fact, if Medicare and Medicare cuts are passed to others, there would be no savings to society but merely a shifting of the hospital cost burden. • There are two groups of patients: private (insured or self-pay) and Medicare. The downward-sloping demand curve for the private sector and the constant Medicare hospital reimbursement rate (R 1) per patients are shown in Figure 14 -2. (1) If the hospital is unable to price discriminate in the private sector, it will accept Q 1 private patients. It will also accept all Medicare patients (Q 2) at the Medicare Rate, so the hospital treat a total of (Q 1+Q 2) patients. Total revenue of (P 1 Q 1+R 1 Q 2) produce a surplus over variable cost equal to (P 1 -C 1)Q 1+(R 1 -C 1)Q 2 (2) Suppose that the Medicare reimbursement is lowered to R 2 but that rate still cover the average variable and marginal costs, so hospital still accept Q 2, then the private rate may not be affected. Suppose, however, that the hospital’s revenue now fall short of the total costs. If it cannot reduce cost, then the hospital may be closed or be merged. Demand will increase for the remaining hospitals and, as a result, the private rate also could rise.
Closures, Merges and Restructuring in the hospital industry • Cleverly (1993) described the characteristics of failed hospitals as high cost and high prices, low utilization, and little investment in new technologies. • Succi and colleagues (1997) found that the rural hospital gain an advantage and reduce threat of competition by differentiating their services. Those that offer more basic services and high-tech services are less likely to close. • In an emerging literature, there are two effect: The first effect is that hospital is more efficient by downsizing administrative units and eliminate duplication. The second effect is that hospitals have more bargaining power against managed care organization. Sprang et al. (2001) support the first effect. Krishnan (2001) found the second effect because merging hospitals charge higher fee.
Nursing Homes • Background and costs: (1) the burgeoning nursing home population since 1963 and growth of costs are connected to the passage of Medicare and Medicaid in 1965. (2) Medicare reimbursed on a cost basis, but the Balanced Budget Act of 1997 mandated a shift to a prospective payment system. (3)Medicaid pays for the long-term care of the poor. Because Medicaid is administered by the state subject to federal requirement, eligibility requirement as well as payment method can vary widely. States increasingly are adopting case-mix reimbursement system where payment depends on a much larger classification of patient types.
Quality of Care • Scholars have examined the relationship among quality and nursing home size, ownership, expenditures, and source of payment. (1) One would expect some positive association between size and quality as a result of economies of scale and scope. However, Davis’s (1991) review of a large number of studies, including those that used process and structures of quality, suggests that no clear relationship exist. (2)Of the 18 process and outcome studies in Davis’s review of the literature, only 6 indicated a positive relationship between quality and cost or inputs, while the results in 11 are insignificant (one is negative). It indicates that improvements are needed in measuring quality as well as in formulating the statistical models, (3) In the case of nursing home, patients may believe nonprofit organizations are more likely to serve their interest than one motivated by profits. Nursing home costs per patient are higher for nonprofit so that structure measurement are clear on this point. However, analysts have not been able to detect an unambiguous positive relationship between quality and type of costs. (4) Expenditures per resident are lower in home with higher proportion of Medicaid, so that structure measures support a negative relationship between quality and the proportion of Medicaid residents in a nursing home.
Excess demand-Scanlon (1980) • Figure 14 -3 shows the demand costs conditions for a representative nursing home. The demand curve reflects only the private demand (self-pay of insured), while R 1 represents the Medicaid reimbursement rate. The segment between AC and R 1 shows that the number of Medicaid patients seeking admission. For simplicity, assume a constant marginal and variable cost (C 1) up to the capacity level (Qc). • The profit-maximizing nursing home will first select all private patients whose marginal revenue exceeds R 1 and fill the remainder of beds with Medicaid patients. The nursing home admits Q 1 private patients paying a price, P 1, and (Qc-Q 1) Medicaid patients, leaving an excess demand of BC Medicaid patients. • The shortage can be reduced by raising the Medicaid rate at R 2. Nursing homes will raise the private fee to P 2 and substitute A’D’ Medicaid for AD private patients. The excess demand is reduced to B’C’ from BC. • Similarly, an decrease in private demand from lower incomes or less prevalent private long term insurance will increase Medicaid admission and reduce the excess demand.
Financing Long-Term Care(LTC) • The requirement that patients must meet income and asset tests to qualify for nursing home benefits under Medicaid, so some middle class need to deplete his asset. As a result, a variety of proposals have been introduced. • Short and Kemper (1994) shows that the least costly proposal that create a front-end entitlement that covers everyone for a limited period. Back-end entitlement covering everyone after a certain waiting period. The most expensive are proposals without limitations even if they have cost-sharing provision. • The alternative is to greater public spending, especially in an era when many government programs are being downsized, is a strategy to encourage more private longterm coverage or home care. For example, allowing for tax-deductible contributions to long-term care accounts.
Hospice and Home Health • Hospice care is intended for the terminally ill. Most hospital patients receive care in their own home, but the use of special facilities is becoming more prevalent. Medicare introduced hospice benefits in 1983, but higher reimbursement rate in 1989 accelerated growth in the number of hospitals. • 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. In fact, the principal issue is the extent to which home health substitute for “unpaid” care by family members and other caregivers. • Pezzin and colleagues (1996) assume a family utility function: U=U(X, L, F; t) where X represents private goods, L represents leisure, and F represents disabled person’s functioning. The parameter, t, reflects the family’s tastes for privacy and independence. The family is constrained by time and it can use in three way: care for the disabled person to increase F, work to earn income to buy market goods, X, or home and institutional care for the disabled person; and enjoy as leisure time. The point of tangency lie in budget and utility. The point indicates the optimal of X, L and F. It also provides the optimal combination of institutional and home care to produce F and the optimal combination of paid and informal time to produce home care.
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