This paper looks toidentify the changing landscape of healthcare by categorizing hospitals,including the naming important societal impacts of hospitals. The differencebetween nonprofit hospital behavior and that of for-profit hospitals isquestioned. Understanding the need for mergers and the effects of such on costshifting is important. This supplies a valuable look into the future outlook ofhospitals and healthcare. HospitalsHospitals are locatedall over the United States, they can be symbols of aid and even hope forindividuals.
They are the “manifestation of healthcare services and system” ().Historically, hospitals have been a center of provision for a community. Today,hospitals still provide care to individuals within the community; they providehigh-intensity care with specialized aspects and offer a range of surgicalspecialties.
Still, other hospitals, especially those within smaller or ruralcommunities, concentrate on less acute care. Rehabilitation centers and thoseof convalescence can be considered hospitals, as they provide the means forindividuals to gain or recover health. Another reason that hospitals have suchan impact on society? They account for roughly 50% of all healthcareexpenditures within the United States (). Hospitals provide access to care for communities.
In thissense, they impact physicians, both social and mental health status, andquality of life. Naturally, with hospitals being the physical display ofhealthcare, they provide an entry into the healthcare system in theirsurrounding geographical location. They can offer all sorts of care fromprimary care physicians to illness prevention.Hospitalsgive rise to economies of scale and economies of scope. An economy of scaleoccurs when there is a relationship between cost per unit and the size of thefirm (). Therefore, when the size of the firm increases, in an economy ofscale, the cost per unit would decrease.
The thought of this allows the fixedcosts of the firm to be spread across a greater volume of patients. Economiesof scale free up the negotiating power of providers to demand lower prices formajor services. What does this mean? Hospital mergers might be justified on thebasis of cost savings to society.Aneconomy of scope occurs when it is less costly for a firm or organization toproduce multiple certain services (or products) jointly than if separate firmsproduced each of the same services independently (). Economies of scope occurin complex function with multiple entities.
In healthcare, hospitals undergoenvironmental changes that may be related to the specialty, location, andrelation/relationship with other specialties. Economies of scope play a specialrole within healthcare. Specifically, providers would be able to leverage theirscale of practice to create non-traditional streams of revenue such asdirect-to-employer offerings or hospital mergers (). Overall, hospitals are classified as for-profit ornonprofit. For-profit hospitals operate for the sole purpose of creating profitthat could be shared with stockholders in the form of dividends—these profitscan also be reinvested within the hospital.
Today, for-profit hospitals areincreasing in number. Between 2000 and 2010, the number of for-profit hospitalsgrew by 35.2% (749 to 1,013), increased the number of beds provided by 13.4%(109,883 to 124,652), and experienced a 2.
1% occupancy rate increase (55.9% to57.1%) (). In a for-profit hospitals, owners express two basic rights: theright of control, and maintenance of a claim on the residual earnings (profit)of the hospital (). Right of control means that voting occurs on a board ofdirectors, providing voting power for other issues faced by the hospitalincluding administration, management, and stockholder proposals (). Nonprofit hospitals can be either public or private. Byclaiming a nonprofit status, the organization declines the ability toredistribute profits among stockholders. Public nonprofits are federally,state, or locally owned.
Only 3.7% of hospitals within the United States arefederally owned—these include those that serve special groups of individualssuch as Native Americans, military veterans, etc. (). State and locally ownedhospitals make up 18.9% of hospitals in the United States (). They constitute alarge number of mental health facilities, 7.7% (). Local hospitals effectivelyfunction as a ‘safety net’ for disadvantaged populations including theuninsured, underinsured, or those needing services that would be uncompensated().
The largest number of hospitals in the United States areprivately-owned, nonprofit hospitals (50.5%) (). Their primary mission is tobenefit the local community. In order to ‘stay afloat,’ these private nonprofithospitals must operate on several revenue avenues. These methods include patientfees, endowments, donations, and third-party provider reimbursements (). Thenumber of private nonprofits in the United States is decreasing, havingexperienced a decrease of 3% from 2000 to 2010 (3,003 to 2,904) (). Thisdecrease in number of hospitals coincides with a decrease of 4.7% in the numberof beds within these hospitals (582,988 to 555,768) ().
Due to the decrease inhospitals, the occupancy rate has actually increased since 2000 by 1.1% (65.5%to 66.
2%) (). There are three threads of comparison that are typicallymade when comparing for-profit hospitals and nonprofit hospitals. Thesecomparisons are pricing, quality of care, and charity care. Essentially, andsimplistically, the goal for for-profit hospitals is to maximize profits, asthey want to insure stockholders are paid dividends and the value of thecompany increases. This shows stability within the organization, an importantpositive for future or potential investors.
Nonprofit hospitals goals, whensetting prices for care, are to earn a high enough level of revenues to coverthe fixed and variable costs of the hospital. Often times, nonprofits areprovided varying discounts for treating uninsured or underinsured populationsand Medicaid and Medicare patients (). Public hospitals have higher levels ofuncompensated care than private hospitals and these higher costs may havederivational effects (). Fixed costs are costs that are not related to the volumeof services delivered (). An example of this would be the cost of facilities,to a certain point, that should be roughly the same year in and year out.Variable costs are those costs that are directly related to the amount ofservices provided or performed within an organization (). An example of this isthe cost of clinical supplies, if a large number of procedures occur, moreclinical supplies will be purchased and vice versa if there is a small numberof procedures.
The differences in quality of care have actually beenshown to be mainly geographically-related, as the location seems to be the mainfactor behind the difference between nonteaching hospital quality of care andprivate nonprofit or for-profit quality of care; subsequently, there is nostatistically significant difference between nonteaching private nonprofits andnonprofits in general when it comes to quality of care ().Finally,both for-profit and nonprofit hospitals have been traditionally involved incharity services, especially nonprofits. This provision of charity, including involvementin charitable projects and campaigns, is in fact a measure of tax exemption fornonprofits in the United States. The derivational effects seen in levels ofuncompensated care can very well cause more volatile levels of quality of careoffered between hospitals, mainly due to the degree of which these costs may financiallycut into the various revenue avenues ().
However, an event that would cause adecrease in charity would be the hospital’s geographical or market relation toother hospitals within the area in terms of price competition (). Evidenceindicates that when competition between hospitals increases, there is acorrelating decline in charitable actions by the hospital within the community(). As a whole, hospitals provide many levels of importanceto the surrounding community and society. They offer extensive treatments andtreatment options for a plethora of cases, illnesses, and diseases.
Hospitalsprovide access to multiple specialists of medical provision underneath oneroof, containing all the means necessary (typically) to treat a patient fromonset of illness to recovery and full health. Hospitals are physical exhibitionsof health within a community—raising awareness for health through charitablecauses like taking uncompensated treatments and public health campaign or donations(). Economically, hospitals make available various levels of employment withina community, as they are large organizations and require a large amount ofemployees to operate ().
Included in hospitals, specialized treatment centersoffer care for specific issues that patients may have. It has been argued thathospitals could actually lead to cheaper healthcare costs; however, this hasbeen contended and debated by several studies on a number of levels (). In healthcare, the environment is constantly changing.Economically speaking, there will be, and are, financial shifts that arerelated to payment methods and the changing of these payment methods due tomultiple reasons in healthcare coverage. Within society, the burden of diseaseis too constantly changing; because of this, hospitals must remain proactiveand reactive to these shifting burdens and make adjustments in careaccordingly. Helping this issue (or hampering), technological advancements arefast-paced and rapid, the changes affect treatment, diagnosis, prognosis, andscreening for patients adding to consequential changes in funding andefficiency of care. So too do changes in demographics of a location play a rolein the future outlook of hospitals in healthcare. Demographic changes bringwith them differing levels of needed care or specialized care as well asfinancial status of patients, playing a significant role in insurance coverageor even compensation of care, especially with the volatility of the insurancesituation seen in the United States today.
Finally, the expectations for ahealthcare system and the role it should, could, or can play in a community (orhealthcare industry in general) are fluctuating as well. CostShiftingCost shifting isperformed to look to maximize profit through measures of price control or pricesetting; these can come at fixed costs or variable costs (). Given a certainamount of price sensitivity to all parties involved, tighter discriminationbetween pricing of services and whom they might affect plays a substantial partin cost shifting in the healthcare industry (). Cost shifts occur when hospitaldo not set profit-maximizing prices, leaving certain bargaining powers andresultant market powers unused, losing untapped potentials (). Fixed pricingdue to government regulations and reimbursements from programs like Medicareand Medicaid are included in such actions as well as when employers take oncosts that are incurred by employees like health insurance (providing a largeportion of health insurance payment) ().
Actually, there is limited evidence that uninsuredpopulations cause hospitals to increase the pricing of charges to privatelyinsured patients (). However, the higher level of payments charged from privatelyinsured patients most likely correlates with higher hospital costs due to thecompetition within the market (). In sum, the overall effect of cost shiftingto private payers is relatively small when compared to all other medicalexpenditures and those costs related to private payers or charged by privatepayers (). Still, cost shifting can lead to major outcomes. Theseinclude lower prices charged than that of the actual cost of services provided.This imbalance often times leads to the incentive to reduce the services, orquality of, provided (). Thus, these reduced services lead to a shortage ofservices as the economy of the hospital and market become more imbalanced.
Overall, cost shifting occurs when there is a movement of funds away from price-controlledservices (). Economists believe that a decrease in government-providedpayments equates to a decrease or correlates with a decrease in medical pricesto private payers (). This allows for economists to argue that providers mayearn higher profits by switching who they provide treatment to. Because ofthis, there will be a desire to decrease provision to less profitable patientsor perform lower quality of care in less profitable procedures and increase theservices offered to preferential patients and procedures with the ability toprovide profit. MergersMerging of hospitalshas been increasing since the 1990s, often times because mergers createincreased market power and prices for the hospitals ().
Hospital mergers aremostly justified on the basis of cost savings to society, within a community,and for the providers. Inthe 1990s and 2000s, several court cases determined that the merging ofnonprofit hospitals was unlikely to raise prices; however, empirical studieshave contradicted this, Gaynor and Town determined that mergers could lead toan increase in priced of up to 20%, and did typically cause increased prices (, ). Hospitals merge together because they can provide an increase in the brokeringpower between provider and third-party providers, like insurers (). Mergers maylead to increases in Medicare fees among physicians when employed by mergedhospitals; however, a decrease in fee-for-service payments is seen, too ( , ).The effect on pricing should, and in line with indications of Gaynor and Town,lead to augmented price markups ().
Itis particularly vital for providers and hospitals to have the upper hand whennegotiating prices with insurers. Market power increases when hospitals merge,allowing for better bargaining power (). In a merger, increased prices toprivate payers will ultimately lead to increased profits for the hospital;subsequently, mergers see a lower public payment-to-cost ratio because of theincreased higher cost structure applied (). This means that when public ratiosdecline with possible less levels of reimbursement, private ratios rise tooffset such issues to cover costs or even increase overall revenue and profit().Priorto merging, an increased amount of price competition within an area leads to alower rate of upsurge in costs per discharge of patient or even for the patient().
There was a decrease in costs charged when hospitals were located within ahighly competitive market; this indicates that competition slowed hospital costescalations, which is typically seen as a plus for patients (). When mergerswere uncommon, there were lower mortality rates seen in competitive markets,coinciding with competition and the desire of the hospital and providers to beseen as successful and even have a since of victory or ‘winning’ (). However, alarge driver of the change from pre-merger era to post-merger era was that anincreased number of hospitals, causing a competitive market, allowed insurersto develop a higher level of market and bargaining power in price negotiations().Thusmergers began to occur, as seen today. With decreased hospitals overall, thethought is that competition would too decline.
This decreased competition thenallows for the hospital to have higher negotiating power during negotiationswith insurers (). Ultimately, as discussed earlier, pricing could be increaseddepending upon location of the merged hospitals (). Other areas of note includewhen hospitals merge (or even change from nonprofit to for-profit), there is nodecline within the level of charitable actions (). Finally, in 2007, Morse etal stated that as “we progress within this market of consolidation it isbecoming more and more less likely that the merging of nonprofit hospitals canbe viewed as being different from the merging of for-profit hospitals” (). It can be hypothesized that hospitals and healthcareorganizations will continue to consolidate to remain economically viable andoverall, this would see varying effects on four areas: patients, employees,communities, and institutional culture and environment. For patients, therewould be questions regarding price variation, changes in insurance plans andpremiums, possible losses of available treatment locations due to the inabilityof hospitals to maintain economic sustainability. Employees would see a changein work structure and location, whether this be job opportunities or losses. Communities can also be affected positively andnegatively.
The location of the community will see the most results of mergeralterations. As discussed, location plays the principal role in pricing and ifthose communities are unable to pay at a higher level, there could be a reductionin healthcare accessibility within the surrounding region. Finally,institutional cultures and environments change constantly as hospitals mergeand administrations change.
This includes organizational structure tasks androle changes and goals of research and research funding. Several questionsremain for the future of hospitals and healthcare organizations.1. What will be the changes in healthcaredelivery?2. What will happen to the health insuranceprovider sector?3. Are accountable care organizations(ACOs) here to stay?4.
Will continued mergers lead to increasedchanges within the payment methods used?