Medical Care Production and Costs Part 1 Health Economics Fall 2007 - PowerPoint PPT Presentation

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Medical Care Production and Costs Part 1 Health Economics Fall 2007

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Assessing the Productivity of Medical Firms ... in Production of Medical Care ... e.g. staff payroll, utility bills, medical supply costs. Necessary for : ... – PowerPoint PPT presentation

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Title: Medical Care Production and Costs Part 1 Health Economics Fall 2007


1
Medical Care Production and CostsPart 1 Health
EconomicsFall 2007
  • Professor Vivian Ho

2
Outline
  • Motivation
  • Productivity Measures
  • Cost Measures

3
Mergers are transforming the industry
  • 2000 NE Georgia Health system proposed to buy
    Lanier Park Hospital in Gainesville
  • estimated cost savings of 2 million annually.
  • 2002 Anthem (insurance) proposed to acquire
    Trigon Health Care (also an insurer)
  • 9 billion in assets, 13 billion in revenues,
    10 million members.
  • would lead to 75 million in pretax savings in
    2004.

4
Mergers are transforming the industry (cont.)
  • But will mergers help to contain costs and/or
    improve productivity in the industry?
  • Depends upon production and costs in the health
    care sector.

5
Assessing the Productivity of Medical Firms
  • Economists often describe production of output
    as a function of labor and capital
  • q f(n,k)
  • In the case of health care
  • q hospital services
  • n nurses
  • k medical equipment, hospital building

6
Assessing the Productivity of Medical Firms
(cont.)
  • Short run k is fixed, while n is variable

7
Graphical Representation
Total product q f(n,k)
n1
n2
MP Dq / Dn
  • MP is the slope of the TP curve.

8
Graphical Representation
AP q / n
  • AP is the slope of a ray from the origin to the
    TP curve.

C
B
TP
A
9
Practice Question
  • People living in Boston are hospitalized about
    1.5 times as often as those living in New Haven,
    However, the health outcomes of patients in these
    2 cities appear to be identical. Does this mean
    that hospital care has no ability to improve
    health?

10
Substitutability in Production of Medical Care
  • There may be more than one way to produce a given
    level of health care.
  • Licenced practical nurses (LPNs) vs Registered
    Nurses (RNs) in hospitals.
  • LPNs have less training.
  • Maybe not as productive, but not as costly.
  • Physician assistants vs physicians at ambulatory
    clinics.
  • But physician assistants cant prescribe meds in
    most states.

11
Substitutability in Production of Medical Care
(cont.)
  • Elasticity of substitution
  • r D(I1/I2)/I1/I2 D(MP2/MP1)/MP2/MP1
  • change in input ratio, divided by change in
    ratio of inputs MPs.

12
Production Function for Hospital Admissions
  • Jensen and Morrisey (1986)
  • Sample 3,450 non-teaching hospitals in 1983.
  • q hospital admissions
  • inputs physicians, nurses, other staff,
    hospital beds.
  • q a0 a1physicians a2nurses . e
  • Coefficients in regression are MPs.

13
Results
  • Each additional physician generated 6.05 more
    admits per year.
  • Nurses by far the most productive

14
Results (cont.)
  • Each inputs is a substitute for other in
    production process.
  • If wages of nurses rise, can substitute away by
    having more hospital beds.

15
Medical Care Cost
Accounting Costs
  • Explicit costs of doing business.
  • e.g. staff payroll, utility bills, medical
    supply costs.
  • Necessary for
  • Comparing performance evaluation across
    providers/depts.
  • Taxes
  • Government reimbursement/rate setting

16
Medical Care Cost (cost.)
Economic Costs Accounting Costs
  • i.e. opportunity costs.
  • e.g. opportunity cost of a facility being used
    as an outpatient clinic rent it could earn
    otherwise.
  • Necessary for
  • optimal business planning.
  • allows one to consider highest returns to assets
    anywhere, not just vs. direct competitors, or
    w/in health care industry.

17
Recall
  • Given a production function
  • q f (n,k)
  • q hospital services
  • n labor nurse n
  • k capital medical equipment, hospital
  • building

18
Short-Run Total Cost
STC
STC
w n
r k
q0
19
Short-Run Total Cost (cont.)
STC( q ) w n r k
  • In the short run, k is fixed.
  • ? rk is the same, regardless of the amount of
    hospital services (q) produced.
  • As q rises, increases in STC are only due to
    increases in the number of nurses needed (n).

20
Short-Run Total Cost (cont.)
  • Recall Production function initially exhibits
    IRTS
  • Total costs rise at decreasing rate up to q0

STC
STC
w n
r k
q0
21
Marginal and Average Costs
?STC ?q
SMC
?(wn rk)/?q
w(?n/?q) w(1/MPn)
w/MPn
The short run marginal cost of nurses depends on
their marginal productivity.
22
Marginal and Average Costs (cont).
STVC q
SAVC
(wn)/q
w(1/APn)
w/APn
The short run average variable cost of nurses
depends on their average productivity.
23
Numerical Example
  • See handout.

24
Graphing Marginal and Average Costs
SMC
Costs
SMC0
SATC
SAVC
SATC0
SAVC0
0
q
q0
25
Graphing Marginal and Average Costs
  • SATC and SAVC are u-shaped curves.
  • Increasing returns to scale followed by
    decreasing returns to scale.
  • SMC passes through the minimum of both SATC and
    SAVC.
  • If marginal cost is greater than average cost,
    then the cost of one additional unit of output
    must cause the average to rise.

26
Relating Product and Cost Curves
MPn APn
Cost
SMC
SAVC
APn
MPn
0
q1
q3
n
q
n1
n3
27
Average and Marginal Costs (cont.)
  • IRTS followed by DRTS in production leads to U
    shaped AC curve.
  • Hospital doesnt necessarily produce at q (min.
    cost).
  • Depends on hospitals objectives.
  • Even so, will attempt to stay on the cost curve
    (not above it).

28
Average and Marginal Costs (cont.)
  • Why do all of these cost curves matter?
  • Many hospitals operate at a loss (profitslt0) in
    some years.
  • If a hospital seeks to maximize profits, and it
    knows its going to lose money in a given year,
    why should it treat any patients?
  • In the SR, a hospital will still stay open if
    treating patients will cover its fixed costs and
    part of its variable costs.

29
  • The hospital will receive a price P from insurers
    for each patient treated.
  • To max profits, choose q where MRMC.

30
Price per Patient
MC
ATC
P
A
AVC
0
Patients
  • At output q, the hospitals revenues are PAq0.
  • The hospitals total costs are CBq0.
  • The hospital earns negative profits CBAP.

31
MC
Price per Patient
ATC
C
P
A
AVC
E
D
0
Patients
q
  • The hospitals FC are (ATC-AVC)q, or CBDE.
  • If the hospital shuts down, it must still pay for
    FC.
  • Since CBDEgtCBAP, the hospital will lose less if
    it remains open.

32
  • In the SR, FC are critical for determining
    whether a hospital should stay open for business.
  • So, in general, how large are FC?
  • Study of Cook County Hospital in Chicago
    (Roberts, JAMA 1999)
  • Urban public teaching hospital, 1993

33
  • Fixed Costs
  • Capital
  • Worker salaries benefits
  • Building maintenance
  • Utilities
  • Variable Costs
  • Worker supplies (e.g. gloves)
  • Patient care supplies
  • Paper
  • Food
  • Lab supplies
  • Medications

34
  • Why are salary benefits a FC?
  • Workers often have long-term contracts.
  • Many workers wont take jobs w/ frequent layoffs.
  • For Cook, the budget was 84 FC, 16 VC.
  • Often makes sense for Cook to operate at a loss,
    not reduce patient load.

35
  • Cutting the of patients you serve wont save a
    lot if you cant cut FC simultaneously.
  • If you serve 5 fewer patients, you may still
    need to
  • Pay for a CT scanner technician
  • Pay for upkeep of the ER OR
  • Pay annual licensing fees to city state
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