Dr.

Katie Sauer Health Economics

Hospitals and Long Term Care Chapter 14 Overview: I. Hospital Background II. Hospital Utilization and Costs III. Nursing Homes IV. Hospice, Home Health, and Informal Care ____________________________________________________________________ In 2005, there were 5,756 hospitals with close to 1 million beds in the United States. Of the 14.4 million persons employed at all health service sites in 2006, 5.7 million were employed at hospitals. At the same time, the aging of the population has created a major challenge for the adequate provision of long-term care.

Make some observations about the above table.

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) 3. ownership Private: non-profit or proprietary (for-profit) Public: federal, state, county, local 4. size (number of beds) [most short-stay facilities have <200 beds]

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. 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 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 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) Increasingly, hospitals are moving to permanent physician-employees. - use HMOs to attract patients - advertise Many smaller hospitals have closed, or merged, or reorganized. - deal with lower inpatient utilization There is pressure to join networks of providers. Many are focusing on outpatient care. 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) Reimbursement regulations: - Medicare: prospective payments system (PPS) - various state regulations Certificate-of-Need (CON) laws limit capital spending. Hospitals are subject to anti-trust laws. Many hospitals seek accreditation from the Joint Commission on Accreditation of Healthcare Orgs (JCAHO) - JCAHO is private and non-profit, 1952 - very powerful

II. Hospital Utilization and Costs Hospital costs account for about 1/3 of NHE. - increasing at a rate of about 10% per year A. Data

Make some observations about the table above.

Competition and Costs: Usually, competition results in lower costs. Some argue that hospitals may be an exception. - medical arms race (MAR)

game theory example: Suppose there are two hospitals, each considering adding a heart transplant unit.
Hospital B

Add unit

Do not add unit

Add unit Do not add unit

100 100 200 -50 150 200

-50 150

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. B. Empirical Evidence Kessler and McClellan (2000)

Zwanziger and Mooney (2005)

Dranove and colleagues (2002)

Summary:

Hospital A

C. Hospital Cost Shifting For legal and ethical reasons, hospitals often provide uncompensated 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?

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? Empirical Evidence? Morrisey (1995)

Cleverly (1993)

Succi and colleagues (1997)

Jantzen and Loubeau (2000)

Sprang et al. (2001)

Krishnan (2001)

Harrison (2007)

Melnick and Keeler (2007)

Summary:

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. 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 Empirical Evidence: Williams et al., 2005

Jha et al., 2005

Summary:

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) 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 increased both the funding and the nursing industry. 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 Medicaid pays for the long-term care of the poor (elderly and 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

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)

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. 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)

E. Excess Demand For years the industry has been characterized as having excess demand. Economists are intrigued/skeptical of persistent shortages of any commodity. A nursing home admits private (self-paying or insurance) patients and Medicaid patients. Admit private patients where MR exceeds R. (Q1) They will pay p1. Suppose there are Qm Medicare patients wanting admission. A number of them wont get in.

Medicare raises the reimbursement rate: Find where R2 > MR . Admit Q2 private patients. They will pay p2. There are still Qm Medicare patients wanting admission. A smaller number of them wont get in. F. Financing Long-Term Care Patients must meet income and asset requirements to be eligible 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 IV. Hospice, Home Health, and Informal Care The budgetary pressure of caring for the growing elderly population in hospitals and nursing homes has promoted interest in other less costly arrangements. Hospice and home health programs are perceived to be cost 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 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.

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. Benefit was included in initial Medicare legislation in 1965. - 1973 extended to certain disabled people under 65 HHC is one of the fastest growing components of total spending. BBA legislation in 1997 moved reimbursement from cost-based to prospective. ____________________________________________________________________ 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. In the long-term care sector, we focused on nursing homes, 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. _____________________________________________________________________ Discussion Questions: 1. Explain why it is often claimed that hospitals compete for 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 beds may persist over long periods. How can the hypothesis be tested?

4. Informal care provided by children and other family members 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 take advantage of the substitutability to delay entry of the elderly into Long Term Facilities.