Lecture Health economics - Chapter 5: Medical care production and costs. This chapter presents the following content: Motivation, productivity measures, cost measures. | Medical Care Production and Costs Health Economics Fall 2009 Professor Vivian Ho Outline Motivation Productivity Measures Cost Measures Mergers are transforming the industry 2000 – NE Georgia Health system proposed to buy Lanier Park Hospital in Gainesville estimated cost savings of $2 million annually. would lead to $100 million cut in operating costs in first year alone. 2005 – United Health Group (insurance) proposed to merge with PacifiCare Health Systems (also an insurer) 26 million customers. Mergers are transforming the industry (cont.) But will mergers help to contain costs and/or improve productivity in the industry? Depends upon production and costs in the health care sector. Assessing the Productivity of Medical Firms Economists often describe production of output as a function of labor and capital : q = f(n,k) In the case of health care : q = hospital services n = nurses k = medical equipment, hospital building Assessing the Productivity of Medical Firms (cont.) Short run : k is fixed, while n is variable a) At low level of n, k is abundant. Each in nurses when combined with capital greater in services. - potential synergy effect because nurses can work in teams. b) Further in nurses service, but a decreasing rate - law of diminishing marginal productivity. c) “Too many “ nurses can cause congestion, com- munication problems, hospital services Substitutability in Production of Medical Care There may be more than one way to produce a given level of health care. Licenced practical nurses (LPNs) vs Registered Nurses (RNs) in hospitals. LPNs have less training. Maybe not as productive, but not as costly. Physician assistants vs physicians at ambulatory clinics. But physician assistants can’t prescribe meds in most states. Substitutability in Production of Medical Care (cont.) r = 0 no substitutability. r = perfect substitutability. 8 Potential for substitutability If price of 1 input increases, can minimize impact on total costs by substituting away. . | Medical Care Production and Costs Health Economics Fall 2009 Professor Vivian Ho Outline Motivation Productivity Measures Cost Measures Mergers are transforming the industry 2000 – NE Georgia Health system proposed to buy Lanier Park Hospital in Gainesville estimated cost savings of $2 million annually. would lead to $100 million cut in operating costs in first year alone. 2005 – United Health Group (insurance) proposed to merge with PacifiCare Health Systems (also an insurer) 26 million customers. Mergers are transforming the industry (cont.) But will mergers help to contain costs and/or improve productivity in the industry? Depends upon production and costs in the health care sector. Assessing the Productivity of Medical Firms Economists often describe production of output as a function of labor and capital : q = f(n,k) In the case of health care : q = hospital services n = nurses k = medical equipment, hospital building Assessing the Productivity of Medical Firms (cont.) Short
