Transcript
Chapter 6 – The Production, Cost, and Technology of Health Care
Key Ideas
Health producers enjoy potential economies of scale and scope.
Recent econometric work reconfirms that some economies of scale exist in hospitals, at least above the level of 100 beds. This result that suggests that many hospital mergers might be justified on the basis of cost savings to society. We look at such issues in more detail in Chapter 20.
Efficiency relates actual outputs to the best sustainable output. At efficient levels of output, producers combine inputs using the best techniques available. Students must understand that given certain amounts of inputs, efficient levels of output mean that more can be produced.
We typically think of technological change as decreasing costs for a specific good, but in health care we encounter cost-increasing technologies.
Cost-increasing technologies relate either to higher quality care, or to care that was previously unavailable. Examples of the latter would be organ transplants.
Technological change can make it difficult to compare the costs of health care treatment over time, because the goods at different times are not comparable in quality.
Teaching Tips
Isoquants are a lot like indifference curves, only easier to use, because one can measure quantity, whereas one can’t measure utility.
Students have probably encountered economies of scale, but not economies of scope. One may want to use an example of a shopping mall to contrast scale (number of stores or total square footage per store) with scope (variety of stores) in shopping. For production, one might wish to think of pharmaceutical companies that produce more than one type of drug.
Discuss examples of substitution among labor inputs (doctors and nurses or physician assistants; dentists and dental technicians), or between labor inputs and other types of equipment (machines or computers).
Have students find out about the costs of organ transplants. Many may be aware that the transplants can cost $100,000 or more, but are unaware that treatment with anti-rejection drugs can cost $20,000 per year or more (in the United States) for the rest of the patient’s life. A recent Milliman research report provides the following information.
Source: Bentley, T. Scott and Steven G. Hanson, 2011 U.S. Organ and Tissue Transplant Cost Estimates and Discussion, Brookfield WI: Milliman, 2011.
Estimated Billed Charges Per Transplant
180 Days OP Immuno-
Transplant
30 Days Pre-Op Procurement Hospital Physician Post-Op suppresants Total
Single Organ/Tissue
Bone Marrow-Allogenic 41,400 38,900 419,600 22,400 259,800 23,300 805,400
Bone Marrow-Autologous 44,600 18,200 198,200 10,800 84,900 7,100 363,800
Cornea
0 0 16,500 7,900 0 0 24,400
Heart
47,200 80,400 634,300 67,700 137,800 30,300 997,700
Intestine
55,100 78,500 787,900 104,100 146,600 34,600 1,206,800
Kidney
17,000 67,200 91,200 18,500 50,800 18,200 262,900
Liver
25,400 71,000 316,900 46,600 93,900 23,300 577,100
Lung-Single
10,300 73,100 302,900 33,500 117,700 23,700 561,200
Lung-Double
21,400 90,300 458,500 56,300 142,600 28,200 797,300
Pancreas
17,000 65,000 108,900 17,800 61,400 19,300 289,400
Chapter 5 – The Production, Cost, and Technology of Health Care – Multiple Choice
A study finds that the marginal rate of technical substitution between physicians and nurses is -0.5. How many physicians are required to replace 4 nurses, and still produce the same amount of output?
0.5
2.0*
4.0
8.0
A study finds that the marginal rate of technical substitution between physicians and nurses is – 1/10 How many physicians are required to replace 20 nurses, and still produce the same amount of output?
0.
1.
2.*
5.
Refer to the figure below. An isoquant that illustrates substitution possibilities between nurses and physicians is represented by panel
A.
B.
C.
B and C. *
P P P
N N N
Panel A. Panel B. Panel C.
The elasticity of substitution measures:
the responsiveness of the firm’s input ratio to changes in the relative input prices.*
all combinations of inputs that can produce a given level of output.
the slope of the isoquant.
the rate at which firms can substitute output and still keep inputs constant.
If a physician doubles office space and staff, and average costs _______, than _______ of scale are present.
decrease; diseconomies.
increase; diseconomies.*
increase; economies.
remain unchanged; economies.
If a physician halves office space and staff, and average costs _______, than _______ of scale are present.
decrease; economies.
increase; economies.
decrease; diseconomies.
answers b and c are both correct.*
If a hospital has economies of scale with respect to production, then:
it cannot have economies of scope.
it must have economies of scope.
it can only have economies of scope for those activities for which it has economies of scale.
it may or may not have economies of scope.*
Hospital A does emergency care only, and has total costs of $1,000,000 for output of 100 patients per day. Hospital B does surgery only and has total costs of $10,000,000 for 100 surgeries per day. Hospital C does both emergency care (100 patients per day) and surgeries (100 per day) with total costs of $10,500,000. We can say that
Hospital A has economies of scale.
Hospital B has economies of scale.
Hospital C has economies of scale.
Hospital C has economies of scope.*
Hospital D does emergency care only, and has total costs of $1,000,000 for output of 100 patients per day, and total costs of $1,500,000 for 200 patients per day. Hospital D has:
economies of scale.*
diseconomies of scale.
economies of scope.
diseconomies of scope.
Hospital E has total costs of examining and running lab tests for 200 patients of $2,000,000. Hospital F examining 200 patients for $1,250,000 and sends the results to the laboratory for $650,000. We can say that
Hospital E has economies of scale.
Hospital F has economies of scale.
It is more efficient for the health care system to use Hospital F and the lab than Hospital E.*
Hospital E has economies of scope.
Hospital cost studies have difficulty in controlling for
input prices.
quality of care.
case-mix.
All of the above.*
If hospital studies do not control for case-mix, they may confuse:
quantity with quality.
case difficulty with hospital inefficiency.*
nonprofit with for-profit hospitals.
hospital costs with hospital patient counts.
Refer to the isoquant figure below. Which hospital is using the most inefficient amount of labor?
A.
B.
C.*
D.
K
A
B C
D
Q =90
L
Refer to the figure above. Which hospital is using the most efficient amount of labor?
A.
B. *
C.
D.
Refer to the figure above. If you were planning to staff and equip a hospital based on overall efficiency, which hospital would you NOT use as a model?
A.
B.
C. *
D.
Which of the following conditions is necessary for allocative efficiency?
MPL/MPK = PL/PK.
The slope of the isoquant equals the slope of the isocost curve.
Firms hire inputs in competitive markets and pay each input the value of its marginal product.
All of the above.*
The _______ have found _________ differences in the efficiencies of for-profit and nonprofit hospitals.
DEA and stochastic frontier; small.*
DEA and stochastic frontier; large.
random frontier and stochastic frontier; no.
mapping method and DEA; large.
In the figure above, point _______ represents a hospital with inefficient production in a hospital cost function.
A*
B
D
E
In the figure above, point _______ represents an infeasible production point.
A
B
C
D*
In the figure above, point ______ represents a least cost production point.
B
C*
E
Answers (a), (b), and (c) are all on the frontier, so they are all least cost.
Refer to the figure below. Panel A illustrates a cost _______ technological change and panel B a cost _______ technological change.
increasing; decreasing.
decreasing; increasing.*
decreasing; decreasing.
increasing; increasing.
Refer to panel B in the figure below. We see a(n) ________ of _______ percent in the cost per unit output
increase; 8.0.
decrease; 12.5.
decrease; 7.0.
increase; 14.3.*
K K
Q =100 Q =100 (higher quality)
Q =100 Q =100
L L
Panel A Panel B
Refer to the figure above. Panel A illustrates a cost _______ technological change and panel B a cost _______ technological change moving from Q to Q.
increasing; decreasing.
decreasing; increasing.*
decreasing; decreasing.
increasing; increasing.
Refer to panel B in the figure above. We see a(n) ________ of _______ percent in the cost per unit output moving from Q to Q.
increase; 8.0.
decrease; 12.5.
decrease; 7.0.
increase; 14.3.*
Recent research looking at health care costs has found that:
costs have increased even more than we had suspected.
evaluation of quality is essential to construct sound measures of inflation.
the substantial quality improvement in the treatment of heart attack suggests that previous estimates of inflation in health care be reduced.
Answers (b) and (c) are correct.*
Suppose that cost per day of treatment rises by 10% in a given year. If the quality of treatment per day rises by 8%, then:
cost per quality adjusted day has risen by 18%.
cost per quality adjusted day has risen by 2%.*
cost per quality adjusted day has fallen by 2%.
cost per quality adjust day has fallen by 80%.
Suppose that cost per day of treatment rises by 4% in a given year. If the quality of treatment per day rises by 5%, then:
cost per quality adjusted day has risen by 9%.
cost per quality adjusted day has risen by 1%.
cost per quality adjusted day has fallen by 1%.*
cost per quality adjust day has fallen by 20%.
Dranove and Linderooth found that the gains from closing inefficient hospitals:
fell short of the increased patient travel costs, leading to a welfare loss.
exceeded the increased patient travel costs, leading to a welfare gain.
suggested that there had previously been too many hospitals.
answers b and c are correct.*
Recent research found that _______ and ________ physicians are more likely to adopt new technologies.
younger; rurally located.
younger; urban located.*
older; rurally located.
older; urban located.
The adoption of new technology tends to follow a ________ distribution, and tends to be stifled by _________.
chi-squared; competition.
chi-squared; government regulation.
logistic; government regulation.*
logistic; HMO market penetration.
