900 words relflection paper on chapter 5 and 6 Make sure is in your words.

CHAPTER 5
THE PHYSICIAN LABOR MARKET

Bhattacharya, Hyde and Tu – Health Economics

Outline

The training of physicians
Medical school & residency
Returns to medical training
Work hours
Barriers to entry
Physician agency
Physician-induced demand
Discrimination

The training of physicians

Bhattacharya, Hyde and Tu – Health Economics

Medical school
Entry into med school is competitive and selective worldwide
In the US, average 50% of applicants are accepted into at least one school
Length of medical school varies across country
US & Canada applicants must first get a bachelor’s degree
European applicants go directly from high school
Medical school can be super-expensive
US: $140k — $225k for four years
European medical training often heavily subsidized

Bhattacharya, Hyde and Tu – Health Economics

Residency
In addition to classroom work, physicians-in-training must also gain hospital experience
Residency is a period of on-the-job training following medical school
New residents lack experience, and when new residents arrive at a hospital, empirical evidence that medical errors go up
“July effect” in the US
“August killing season” in the UK

Bhattacharya, Hyde and Tu – Health Economics

Physician work-hours
Work hours
Over 60 hours a week
On call residents could work up to 30 consecutive hours

In 2003, implementation to limit number of hours/week for US doctors
No more than 80 hours a week
No change in patient mortality
Many residents still work over 80 hours a week, but report only 80 hours

Bhattacharya, Hyde and Tu – Health Economics

Work-hour tradeoffs
Longer work-hours
Fatigue may impair physicians’ cognitive abilities and in turn may affect patient health

Shorter work-hours
Requires more hand-offs by physicians and thus greater chance for error
Empirical question which effect dominates

Bhattacharya, Hyde and Tu – Health Economics

Shorter hours leads to fewer errors
Randomized experiment at Brigham and Woman’s ICU at Harvard (2004)
2 groups: traditional hours (80 hours/week) & short work week (60 hours/week)

Traditional hour group
Committed 36% more serious medical errors
21% more medication errors
5.6 times more diagnostic errors
Senior physicians intercepted most serious errors

Returns to medical training

Bhattacharya, Hyde and Tu – Health Economics

Returns to medical training
Unlike most occupations, returns to medical training are very back-loaded
Medical school & residency expensive in direct costs and opportunity costs
So those who choose being physician are patient enough to value future returns

Bhattacharya, Hyde and Tu – Health Economics

Net present value
Net present value is a way of calculating value of all future streams of income (from today’s perspective)

Discount factor δ is a measure of how much less an individual values future income over present income
δ lies between 0 and 1; small if impatient and large if patient
Those with high δ have high NPV from being a physician
Those with low δ have low NPV (and maybe even negative NPV)

Bhattacharya, Hyde and Tu – Health Economics

Discount factor
Another way of expressing discount factor is:

Where r is the discount rate, analogous to the market interest rate that would make a person with discount factor δ indifferent between saving for tomorrow and spending today
Ex: δ = 0.90 corresponds with r = 0.11
Very patient have high discount factors δ and low discount rates r
δ = 1/(1+r)

Bhattacharya, Hyde and Tu – Health Economics

Internal rate of return (IRR)
Consider two possible career choices P and C with incomes paths Ip and Ic
Internal rate of return r* is the discount rate which equalizes the NPV of both careers (or the difference between NPV(p) – NPV(c) = 0 )

Someone with IRR of r* values career P and career C exactly equally

Bhattacharya, Hyde and Tu – Health Economics

Internal rate of return
IRR in medicine is typically between 11% and 14%!
Significantly higher than market interest rate
This is true for dentists and lawyers too
IRR may be even higher for medical specialists like neurosurgeons and immunologists
The fact that the IRR has stayed high is curious
Suggests that being a physician is highly lucrative
Why hasn’t that attracted more physicians, which would have pushed the IRR back down to market levels?

Bhattacharya, Hyde and Tu – Health Economics

Barriers to entry
Barriers to entry may explain the high IRR
In 19th century, becoming a doctor was simple
Anyone could do it, no regulation about training

American Medical Association (1847)
Pre-req’s for medical school
4 years medical school
Require doctors to have a license to practice
1910 Flexner Report helped shut down low-quality med schools

Result: less med schools and less med students

Bhattacharya, Hyde and Tu – Health Economics

More barriers to entry
Caps on medical school class size
Doctors need license to practice on their own
International med graduates
Long and arduous process to practice in the US
Nurses and Physician Assistants
Limited in scope of practice
Alternative medicine
Chiropractors, acupuncturists, etc. need licensure too

Bhattacharya, Hyde and Tu – Health Economics

Tradeoffs from barriers to entry
Because of barriers to entry, consumers have to pay above the competitive price
Physicians therefore earn monopoly rents
Def. wages above the competitive price due to artificial constraint of the market

Barriers to entry ensure that physicians are qualified

Physician agents

Bhattacharya, Hyde and Tu – Health Economics

Physicians as agents
Patients trust physicians to act as perfect agents for their health
Doctors’ foremost concern should be patients’ well-being
Not their own financial status or reputation
Are doctors always perfect agents for their patients?

Bhattacharya, Hyde and Tu – Health Economics

Physician-induced demand (PID)
Information asymmetry between doctor and patient
Patients cannot assess whether an extra test or procedure ordered by doctor is necessary

Financial incentive for doctors to prescribe more services than needed

Empirical evidence that when reimbursement rates for various procedures change, doctors prescription practices also change

Bhattacharya, Hyde and Tu – Health Economics

Defensive medicine
Defensive medicine
Overutilization of testing and services
Protects against malpractice lawsuits

Doctors fearful of lawsuit may overprescribe (and overcharge) for only marginally-useful procedures
Mello et al. (2010) estimate that medical liability system in the US costs $55.6 billion annually

Bhattacharya, Hyde and Tu – Health Economics

Racial discrimination
Types of discrimination
Taste-based
Preferential treatment for certain groups of patients
Conscious or unconscious
Statistical
Stereotypes on biology or behavioral tendencies
Discrimination can be efficient or inefficient
Some discrimination may harm patients, but others may benefit them

Bhattacharya, Hyde and Tu – Health Economics

Evidence of discrimination
Audit study (Shulman et al. 1999)
Fictional patient histories
Black and white actors
Patients told doctors same script, background, and hand motions
Only difference was the race of “patient”/actor
Results
Physicians less likely to recommend standard treatment if patient was black
Taste-based or statistical discrimination?
Efficient of inefficient discrimination?

Bhattacharya, Hyde and Tu – Health Economics

Efficient discrimination
Taste-based is always inefficient
Statistical may be efficient
Efficient if medical evidence to treat racial groups differently
Ex: optimal hypertension treatment is different for blacks than for whites

Bhattacharya, Hyde and Tu – Health Economics

Conclusion
Physician supply highly regulated
Leads to a shortage of doctors
Hard for other health care providers to fill the void

Investment returns to being a doctor and specializing is very high

Physicians are not always perfect agents of care
Overutilization of care
Physician-induced demand and defensive medicine
Racial discrimination

CHAPTER 6
THE HOSPITAL INDUSTRY

Bhattacharya, Hyde and Tu – Health Economics

History of hospitals
19th century hospitals could be fatal places to go to for medical care
Higher mortality rates in the hospital than at home
Late 1800s innovations helped lift hospital reputation
Germ theory of disease
Antiseptic techniques
Anesthesia
X-ray technology
Increased demand for hospital surgeries led to increased need for more hospital resources

Bhattacharya, Hyde and Tu – Health Economics

History of hospitals
In 1946, the Hill-Burton Act increased the number of hospitals in the US
Congress gave monies for building hospitals
Any hospital receiving money had to provide free/low cost care to the poor
Result: more hospitals and more hospital beds

Bhattacharya, Hyde and Tu – Health Economics

History of hospitals
Technology advances have reduced recovery times
Insurer increasingly design hospital payment to incentive shorter hospital stays

Trend toward
Increased outpatient visits
Decreased length of stay

For example, the Diagnostic Resource Groups (DRG) reimbursement method used by U.S. Medicare pays hospitals based on the patient’s initial diagnosis and does not depend on the number of days the patient actually spends in the hospital.
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Ch 6: The Hospital Industry
THE RELATIONSHIP BETWEEN HOSPITALS AND PHYSICIANS

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Bhattacharya, Hyde and Tu – Health Economics

Different modes of hospital-physician relationships
Modes:
“Physicians’ workbench” (Majority in US)
Physicians not directly employed by hospital
Direct employees (UK NHS; US “hospitalists”)
Physician-owned hospitals (Japan; US)
Tradeoffs between the different modes:
Physician loyalty to hospital or the patient?
Doctors without connection to the hospital may overuse hospital resources

Bhattacharya, Hyde and Tu – Health Economics

Surgical mortality rates decrease with increased hospital volume

Learning-by-doing hypothesis
High volume leads to good outcomes
Selective-referral hypothesis
Good outcomes leads to high volume
Positive volume-outcome correlation

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Bhattacharya, Hyde and Tu – Health Economics

Does hospital experience or physician experience matter?
Should you prefer having your surgery with an experienced physician or in an experienced hospital?

McGrath et al. (2000) find
Hospitals with more surgical experience have fewer complications than physicians with high experience

Finding makes sense if teams of medical workers collaborate on surgeries, so individual physician experience less impactful

Compare outcomes of Medicare patients undergoing surgery to unclog coronary arteries (PCI)
Experience of the hospital is more important than the attending surgeon’s experience
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Ch 6: The hospital industry
THE RELATIONSHIP BETWEEN HOSPITALS AND HOSPITALS

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Bhattacharya, Hyde and Tu – Health Economics

Differentiated product oligopoly
Hospital industry is a differentiated product oligopoly
Strict barriers to entry
Buildings, technology, staff, administration, etc.
Few firms (oligopoly)
Services provided by each firm are not perfect substitutes (differentiated products)
Herfindahl-Hirschman Index
HHI = ∑ si2
si = market share for a firm
If HHI closer to 1 means few firms in the market (highly concentrated)
If HHI closer to 0 means a large number of firms in the market

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Bhattacharya, Hyde and Tu – Health Economics

Limited competition
Not just due to barriers to entry. Also:
Because of insurance,
Prices not transparent
Moral hazard for insured patients
Government often sets prices
Emergency nature of health care means that patients are unable to search for the “best” and “cheapest” hospital

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Bhattacharya, Hyde and Tu – Health Economics

Is hospital competition good for patients?
Typically, competition improves quality and lowers prices.
BUT
Ubiquity of insurance hinders price competition
Patients are typically referred to hospitals by physicians, so hospitals compete for physicians
Medical arms race hypothesis: greater competition among hospitals for physicians can result in redundancy in and overconsumption of medical technologies. This can actually increase costs without improving quality
Lots of empirical research about the effect of hospital competition on patient outcomes: mixed findings and different policy implications.

Bhattacharya, Hyde and Tu – Health Economics

For-profit and nonprofit hospitals
US hospital industry has both for-profit and nonprofit
hospitals
Majority of hospitals are nonprofit
2009: 75% of private hospitals organized as nonprofits

Benefits of nonprofit status:
Exempt from taxes
Donors receive a tax deduction

Costs of nonprofit status:
Cannot sell stock
Cannot distribute profits to owners
Restricted to certain charitable activities

Bhattacharya, Hyde and Tu – Health Economics

Why do nonprofits exist?
Theories for nonprofit existence
Altruistic-motive theory
Some entrepreneurs prefer altruism over profits
Government-failure theory
Politics ineffectively help those in need
Asymmetric information
Donors trust nonprofits more with money
Nonprofits are for-profits in disguise
“profits” are distributed as higher wages or non-monetary benefits
Mixed study results

Ch 6: The hospital industry
THE RELATIONSHIP BETWEEN HOSPITALS AND PAYERS

Bhattacharya, Hyde and Tu – Health Economics

Prices vary greatly across hospitals
According to public price lists or “chargemasters”, the cost of a chest x-ray in 2004 ranged between $120 and $1,519 across seven California hospitals
Tremendous variability!!
But in actuality, buyers (both insurers and patients) rarely pay the chargemaster price
Instead, hospitals and insurers — both private and public — periodically negotiate rates
Rates vary with relative bargaining power of hospital & insurer
The same hospital may receive different rates from different insurer

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Bhattacharya, Hyde and Tu – Health Economics

Who pays for uncompensated care?
Ultimately, someone has to pay for uncompensated care.
Unpaid hospital care is paid for through cost-shifting
Rich patients pay for poor patients’ care (cross-subsidization)
In the US, reimbursement rates much higher for private insurers than for Medicaid or Medicare
Uncompensated care: hospital charges not covered by out-of-pocket payments, public insurance, or private insurance.
Last-resort laws mandate that hospitals treat all patients who enter their emergency rooms.

What happens when a patient lacks the resources and insurance to pay for this care?

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