Hospital Economics


Health Economics

  • Hospitals are characteristically (though not invariably) non-profit institutions that are often also registered charities (or have a similar status). The essential characteristic of a non-profit institution is that its owners (usually either 'trustees' when the hospital is privately owned, or publicly appointed non-executive directors when publicly owned) do not have the right to any residual profit, which may not be taken out of the business. Charitable status also grants them exemption from many of the obligations of for-profit organizations, including exemption from corporation tax. These (together with some other characteristics) give rise to the special treatment of hospitals in economics. A puzzle that arises is why this form of organization is so common, whether the hospital be privately owned non-profit (where the owners are effectively the trustees) or publicly owned non-profit (where the owner is a government). Embarrassingly, there is no good answer to this question (in economics). Most attempts run along the lines that hospitals are there to internalize marginal (Pareto-relevant) externalities and produce services that have in many respects the character of public goods. However, while this suggests that hospitals (of any kind) are likely to under-produce without special incentives, it scarcely explains why (or justifies why) they should be publicly owned or be charitable, as distinct from being in receipt of a public subsidy in return for providing services of a kind and on a scale they would not otherwise choose.

    Another explanation rests on the assertion that non-profit organiza tions are more trustworthy than for-profits. Yet other explanations arise from the historic context in which most hospitals began (as charitable foundations for the poor sick) but then gradually became centres of expertise as medical science progressed, eventually becoming centres for the treatment of all without, however, having shed their legal status.

    Besides the for-profit/non-profit issue is the public/private issue. Why are hospitals such popular targets for being publicly owned? There exist popular beliefs that public ownership is somehow more efficient than private, or that public ownership in the specific case of medical care is more efficient than private (which is hard to pin down theoretically, desperately difficult to nail empirically and whose advocates - this is largely a world of advocacy rather than analysis - seem less concerned with primary care (general practitioners are almost universally private in all systems) than secondary. Other explanations are managerial in nature, to the effect that it is easier (cheaper) to manage hospitals in accordance with a set of public objectives if they are directly line-managed from the 'ministry' than if they were private institutions under contract to the same ministry. Again, the theory is unclear and the evidence is absent (which is not, of course, the same as saying there is evidence of absence of a case for the private production plus public subsidy argument).

    One set of reasons for the evidence being so difficult to obtain in this area, in addition to the absence of any coherent theory, is that (1) there is a huge variance in the performance of hospitals (however judged) within the non-profit groups (and within the public or charitable sectors) as well as across them; (2) hospitals produce multiple outputs that are easy to oversimplify (e.g. 'deaths and discharges' - as though the difference did not matter) but difficult to summarize in ways that are conducive to quantitative analysis ; (3) hospitals also produce widely differing mixes of these outputs (notably varying in their case-mix); (4) hospitals are presented with human cases of widely varying 'difficulty' (both in diagnosis and treatment); and (5) hospitals also have a widely varying perceived 'quality' independently of the goodness of their clinical outcomes. In quantitative analysis it is consequently very easy to fall foul of the problem of omitted variable bias.

    Amongst the more plausible partial theories of hospitals in econom ics is a theory that builds on the descriptive historical account alluded to above and sees them essentially as doctors' workshops. This approach utilizes a version of interest group theory in which being able to admit patients to hospital became a powerful right through which doctors increasingly acquired control over hospitals - and, in particular, over other doctors and any threat their behaviour might constitute by way of impediment to the private practice of medicine. The non-profit mode suits this interest group by ensuring the dominance of their interests over those of shareholders. The public acquiesce in this arrangement partly because of asymmetry of information and partly because, unlike the doctors, they are diffuse and disorganized.