Module 3: Hospital Pricing and Competition

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# Module 3: Hospital Pricing and Competition
## Part 0: Motivation
### Ian McCarthy | Emory University
### Econ 372

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# History of hospitals

- Before 1900: Just don't go to the hospital! (at least in the U.S.)
  - mainly charity care
  - hospitals were a learning experience for physicians

- Early 1900s: big safety and technological improvements

- Mid 1900s: huge growth, especially in wealthy and urban areas
  - Medicare and Medicaid in 1965 (Social Security Act)

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# Now
As we know, we now spend <b>a lot</b> on health care in the U.S., and a big part of that is very high health care prices (and a big part of that is hospital prices)

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# Ownership types

1. Private not-for-profit: About 60%

2. For-profit: About 20%

3. State and local gov't: About 20%

<br>
<div class="smalltext">Source: <a href="https://www.aha.org/statistics/fast-facts-us-hospitals">AHA Fast Facts</a></div>

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# Non-profit hospitals
What does it mean to be a not-for-profit hospital?<br>

From an economics perspective:
- Hospital assumed to maximize some objective function, `\(u(q,z)\)`, subject to a production constraint

- `\(q\)` denotes quantity of care and `\(z\)` denotes quality of care

- Production is constrained by the break-even condition

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# Non-profit hospitals
What does it mean to be a not-for-profit hospital?<br>

From a practical perspective:
- Profits must be re-invested into the hospital

- Must show "community benefit" (no consensus definition...includes uncompensated care, services to Medicaid, and certain specialized services that are generally unprofitable)

- No taxes! and tax-free bonds

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# Non-profit hospitals and tax benefits
- <span>&#36;</span>24.6 billion in tax exemptions in 2011

- <span>&#36;</span>62.4 billion in "community benefits"<br>

- [Washington Post Article](https://www.washingtonpost.com/national/health-science/value-of-tax-breaks-for-nonprofit-hospitals-doubled-in-a-decade/2015/06/17/4162c640-1450-11e5-9ddc-e3353542100c_story.html?utm_term=.4f877a72a09f)<br>

What do you think? Are these community benefits measured appropriately?

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# What is a non-profit hospital?
The real question is...what is the hospital's objective function?

- For-profit in disguise
- Output maximizers
- Tax-benefit maximizers
- Social welfare maximizers<br>

Most empirical evidence doesn't find much of a difference between FP and NFP hospitals, except FPs have higher prices. Why is that?

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# For-profit hospitals
These are easier to study theoretically...just a standard profit maximizing firm.

- `\(\pi=P(q)q - C(q),\)` where `\(q\)` denotes quantity of care

- Firm has some market power and so faces a downward sloping demand curve