Hospital Behaviour


Health Economics

  • Theories of the behaviour of hospitals as institutions generally take their non-profit status as given (see Hospital Economics) and then explore models and their comparative statics for purposes of explanation and prediction. Despite the potentially complex interactions between the Chief Executive Officer, the Board (of 'trustees') and senior clinical staff, it is generally assumed that 'the hospital' can be characterized as an individual and that it maximizes a utility function defined over entities such as quantity of service, quality and net income. This function is maximized subject to a budget constraint and to a condition that the net residual ('profit') be zero, so that average cost = average revenue and there may be elements of X-inefficiency as decision-makers work to ensure that average cost is sufficiently high for the purpose (the hospital is, to some extent, a 'conspicuous producer', using prestigious technologies that are not efficient from a societal perspective (for some people this may, of course, be an indicator of 'quality'). The limiting case when doctors' incomes are the only arguments in the utility function produces a theory in which the hospital is assumed to maximize net revenue per (already on the staff roll) doctor.

    Where there is competition in the market for hospital services, one predicts that all these utility-maximizing models tend to converge on the general profit-maximizing model of the firm, even though the ownership (shares) of the hospital is not tradable in capital markets. This is expected partly because price competition will drive out hospitals (or hospital managements) that inflate costs in order to generate sources of utility for management and partly because new entrants (if there are no significant barriers to entry) will tend to cause prices in established institutions to fall and income residuals, whether for spending on on-the-job or take-home sources of utility, will fall. In fact, there is a secular trend in the US for non-profit hospitals to convert to for-profit status and in other jurisdictions, private sector providers (whether for profit or non-profit) are increasingly being allowed to compete with public sector hospitals for contracts to provide services for publicly insured patients.

    Empirically, it is hard to detect differences that would enable one to discriminate between these rival theories. This is particularly so in markets where competition is limited, where third party payers have considerable influence on caseloads, case-mix and reimbursement rates, and where exit barriers may be strong.