This such an impact on society? They

This paper looks to
identify the changing landscape of healthcare by categorizing hospitals,
including the naming important societal impacts of hospitals. The difference
between nonprofit hospital behavior and that of for-profit hospitals is
questioned. Understanding the need for mergers and the effects of such on cost
shifting is important. This supplies a valuable look into the future outlook of
hospitals and healthcare.

 

Hospitals

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Hospitals are located
all over the United States, they can be symbols of aid and even hope for
individuals. 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 provide
high-intensity care with specialized aspects and offer a range of surgical
specialties. Still, other hospitals, especially those within smaller or rural
communities, concentrate on less acute care. Rehabilitation centers and those
of convalescence can be considered hospitals, as they provide the means for
individuals to gain or recover health. Another reason that hospitals have such
an impact on society? They account for roughly 50% of all healthcare
expenditures within the United States ().

            Hospitals provide access to care for communities. In this
sense, they impact physicians, both social and mental health status, and
quality of life. Naturally, with hospitals being the physical display of
healthcare, they provide an entry into the healthcare system in their
surrounding geographical location. They can offer all sorts of care from
primary care physicians to illness prevention.

Hospitals
give rise to economies of scale and economies of scope. An economy of scale
occurs when there is a relationship between cost per unit and the size of the
firm (). Therefore, when the size of the firm increases, in an economy of
scale, the cost per unit would decrease. The thought of this allows the fixed
costs of the firm to be spread across a greater volume of patients. Economies
of scale free up the negotiating power of providers to demand lower prices for
major services. What does this mean? Hospital mergers might be justified on the
basis of cost savings to society.

An
economy of scope occurs when it is less costly for a firm or organization to
produce multiple certain services (or products) jointly than if separate firms
produced each of the same services independently (). Economies of scope occur
in complex function with multiple entities. In healthcare, hospitals undergo
environmental changes that may be related to the specialty, location, and
relation/relationship with other specialties. Economies of scope play a special
role within healthcare. Specifically, providers would be able to leverage their
scale of practice to create non-traditional streams of revenue such as
direct-to-employer offerings or hospital mergers ().

            Overall, hospitals are classified as for-profit or
nonprofit. For-profit hospitals operate for the sole purpose of creating profit
that could be shared with stockholders in the form of dividends—these profits
can also be reinvested within the hospital. Today, for-profit hospitals are
increasing in number. Between 2000 and 2010, the number of for-profit hospitals
grew 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% to
57.1%) (). In a for-profit hospitals, owners express two basic rights: the
right 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 of
directors, providing voting power for other issues faced by the hospital
including administration, management, and stockholder proposals ().

            Nonprofit hospitals can be either public or private. By
claiming a nonprofit status, the organization declines the ability to
redistribute profits among stockholders. Public nonprofits are federally,
state, or locally owned. Only 3.7% of hospitals within the United States are
federally owned—these include those that serve special groups of individuals
such as Native Americans, military veterans, etc. (). State and locally owned
hospitals make up 18.9% of hospitals in the United States (). They constitute a
large number of mental health facilities, 7.7% (). Local hospitals effectively
function as a ‘safety net’ for disadvantaged populations including the
uninsured, underinsured, or those needing services that would be uncompensated
().

            The largest number of hospitals in the United States are
privately-owned, nonprofit hospitals (50.5%) (). Their primary mission is to
benefit the local community. In order to ‘stay afloat,’ these private nonprofit
hospitals must operate on several revenue avenues. These methods include patient
fees, endowments, donations, and third-party provider reimbursements (). The
number of private nonprofits in the United States is decreasing, having
experienced a decrease of 3% from 2000 to 2010 (3,003 to 2,904) (). This
decrease in number of hospitals coincides with a decrease of 4.7% in the number
of beds within these hospitals (582,988 to 555,768) (). Due to the decrease in
hospitals, the occupancy rate has actually increased since 2000 by 1.1% (65.5%
to 66.2%) ().

            There are three threads of comparison that are typically
made when comparing for-profit hospitals and nonprofit hospitals. These
comparisons are pricing, quality of care, and charity care. Essentially, and
simplistically, the goal for for-profit hospitals is to maximize profits, as
they want to insure stockholders are paid dividends and the value of the
company increases. This shows stability within the organization, an important
positive for future or potential investors. Nonprofit hospitals goals, when
setting prices for care, are to earn a high enough level of revenues to cover
the fixed and variable costs of the hospital. Often times, nonprofits are
provided varying discounts for treating uninsured or underinsured populations
and Medicaid and Medicare patients (). Public hospitals have higher levels of
uncompensated care than private hospitals and these higher costs may have
derivational effects ().

            Fixed costs are costs that are not related to the volume
of 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 of
services provided or performed within an organization (). An example of this is
the cost of clinical supplies, if a large number of procedures occur, more
clinical supplies will be purchased and vice versa if there is a small number
of procedures.

            The differences in quality of care have actually been
shown to be mainly geographically-related, as the location seems to be the main
factor behind the difference between nonteaching hospital quality of care and
private nonprofit or for-profit quality of care; subsequently, there is no
statistically significant difference between nonteaching private nonprofits and
nonprofits in general when it comes to quality of care ().

Finally,
both for-profit and nonprofit hospitals have been traditionally involved in
charity services, especially nonprofits. This provision of charity, including involvement
in charitable projects and campaigns, is in fact a measure of tax exemption for
nonprofits in the United States. The derivational effects seen in levels of
uncompensated care can very well cause more volatile levels of quality of care
offered between hospitals, mainly due to the degree of which these costs may financially
cut into the various revenue avenues (). However, an event that would cause a
decrease in charity would be the hospital’s geographical or market relation to
other hospitals within the area in terms of price competition (). Evidence
indicates that when competition between hospitals increases, there is a
correlating decline in charitable actions by the hospital within the community
().

            As a whole, hospitals provide many levels of importance
to the surrounding community and society. They offer extensive treatments and
treatment options for a plethora of cases, illnesses, and diseases. Hospitals
provide access to multiple specialists of medical provision underneath one
roof, containing all the means necessary (typically) to treat a patient from
onset of illness to recovery and full health. Hospitals are physical exhibitions
of health within a community—raising awareness for health through charitable
causes like taking uncompensated treatments and public health campaign or donations
(). Economically, hospitals make available various levels of employment within
a community, as they are large organizations and require a large amount of
employees to operate (). Included in hospitals, specialized treatment centers
offer care for specific issues that patients may have. It has been argued that
hospitals could actually lead to cheaper healthcare costs; however, this has
been 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 are
related to payment methods and the changing of these payment methods due to
multiple reasons in healthcare coverage. Within society, the burden of disease
is too constantly changing; because of this, hospitals must remain proactive
and reactive to these shifting burdens and make adjustments in care
accordingly. Helping this issue (or hampering), technological advancements are
fast-paced and rapid, the changes affect treatment, diagnosis, prognosis, and
screening for patients adding to consequential changes in funding and
efficiency of care. So too do changes in demographics of a location play a role
in the future outlook of hospitals in healthcare. Demographic changes bring
with them differing levels of needed care or specialized care as well as
financial status of patients, playing a significant role in insurance coverage
or even compensation of care, especially with the volatility of the insurance
situation seen in the United States today. Finally, the expectations for a
healthcare system and the role it should, could, or can play in a community (or
healthcare industry in general) are fluctuating as well.

 

Cost
Shifting

Cost shifting is
performed to look to maximize profit through measures of price control or price
setting; these can come at fixed costs or variable costs (). Given a certain
amount of price sensitivity to all parties involved, tighter discrimination
between pricing of services and whom they might affect plays a substantial part
in cost shifting in the healthcare industry (). Cost shifts occur when hospital
do not set profit-maximizing prices, leaving certain bargaining powers and
resultant market powers unused, losing untapped potentials (). Fixed pricing
due to government regulations and reimbursements from programs like Medicare
and Medicaid are included in such actions as well as when employers take on
costs that are incurred by employees like health insurance (providing a large
portion of health insurance payment) ().

            Actually, there is limited evidence that uninsured
populations cause hospitals to increase the pricing of charges to privately
insured patients (). However, the higher level of payments charged from privately
insured patients most likely correlates with higher hospital costs due to the
competition within the market (). In sum, the overall effect of cost shifting
to private payers is relatively small when compared to all other medical
expenditures and those costs related to private payers or charged by private
payers ().

            Still, cost shifting can lead to major outcomes. These
include lower prices charged than that of the actual cost of services provided.
This imbalance often times leads to the incentive to reduce the services, or
quality of, provided (). Thus, these reduced services lead to a shortage of
services 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-controlled
services ().

            Economists believe that a decrease in government-provided
payments equates to a decrease or correlates with a decrease in medical prices
to private payers (). This allows for economists to argue that providers may
earn higher profits by switching who they provide treatment to. Because of
this, there will be a desire to decrease provision to less profitable patients
or perform lower quality of care in less profitable procedures and increase the
services offered to preferential patients and procedures with the ability to
provide profit.

 

Mergers

Merging of hospitals
has been increasing since the 1990s, often times because mergers create
increased market power and prices for the hospitals (). Hospital mergers are
mostly justified on the basis of cost savings to society, within a community,
and for the providers.

In
the 1990s and 2000s, several court cases determined that the merging of
nonprofit hospitals was unlikely to raise prices; however, empirical studies
have contradicted this, Gaynor and Town determined that mergers could lead to
an increase in priced of up to 20%, and did typically cause increased prices (
, ). Hospitals merge together because they can provide an increase in the brokering
power between provider and third-party providers, like insurers (). Mergers may
lead to increases in Medicare fees among physicians when employed by merged
hospitals; 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 ().

It
is particularly vital for providers and hospitals to have the upper hand when
negotiating prices with insurers. Market power increases when hospitals merge,
allowing for better bargaining power (). In a merger, increased prices to
private payers will ultimately lead to increased profits for the hospital;
subsequently, mergers see a lower public payment-to-cost ratio because of the
increased higher cost structure applied (). This means that when public ratios
decline with possible less levels of reimbursement, private ratios rise to
offset such issues to cover costs or even increase overall revenue and profit
().

Prior
to merging, an increased amount of price competition within an area leads to a
lower 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 a
highly competitive market; this indicates that competition slowed hospital cost
escalations, which is typically seen as a plus for patients (). When mergers
were uncommon, there were lower mortality rates seen in competitive markets,
coinciding with competition and the desire of the hospital and providers to be
seen as successful and even have a since of victory or ‘winning’ (). However, a
large driver of the change from pre-merger era to post-merger era was that an
increased number of hospitals, causing a competitive market, allowed insurers
to develop a higher level of market and bargaining power in price negotiations
().

Thus
mergers began to occur, as seen today. With decreased hospitals overall, the
thought is that competition would too decline. This decreased competition then
allows for the hospital to have higher negotiating power during negotiations
with insurers (). Ultimately, as discussed earlier, pricing could be increased
depending upon location of the merged hospitals (). Other areas of note include
when hospitals merge (or even change from nonprofit to for-profit), there is no
decline within the level of charitable actions (). Finally, in 2007, Morse et
al stated that as “we progress within this market of consolidation it is
becoming more and more less likely that the merging of nonprofit hospitals can
be viewed as being different from the merging of for-profit hospitals” ().

            It can be hypothesized that hospitals and healthcare
organizations will continue to consolidate to remain economically viable and
overall, this would see varying effects on four areas: patients, employees,
communities, and institutional culture and environment. For patients, there
would be questions regarding price variation, changes in insurance plans and
premiums, possible losses of available treatment locations due to the inability
of hospitals to maintain economic sustainability. Employees would see a change
in work structure and location, whether this be job opportunities or losses.

            Communities can also be affected positively and
negatively. The location of the community will see the most results of merger
alterations. As discussed, location plays the principal role in pricing and if
those communities are unable to pay at a higher level, there could be a reduction
in healthcare accessibility within the surrounding region. Finally,
institutional cultures and environments change constantly as hospitals merge
and administrations change. This includes organizational structure tasks and
role changes and goals of research and research funding.

 

Several questions
remain for the future of hospitals and healthcare organizations.

1.    
What will be the changes in healthcare
delivery?

2.    
What will happen to the health insurance
provider sector?

3.    
Are accountable care organizations
(ACOs) here to stay?

4.    
Will continued mergers lead to increased
changes within the payment methods used?