Volume and Price:
In a perfectly competitive market, the price of surgery charged health care providers should be directly related to the marginal cost of surgery for the hospital. However, the very strategy of volume-based referral we are examining here threatens the competitive nature of the surgery market. By referring more surgeries from low volume hospitals to high volume hospitals, high volume hospitals increase their market share, sometimes resulting in one or a few hospitals gaining monopoly power in certain markets. It is possible that high volume hospitals could use their monopoly power to charge higher prices for surgery. However, because high volume hospitals are exactly that, high volume, they will not want to constrain output (the number of surgeries performed) as might other monopolists. Thus the price effect will be the only effect of monopoly in the market for surgeries.The market effect of monopoly hospitals increasing prices is transfer payments from third party payers to hospitals. In effect, health care providers are paying for increased quality of care, manly in the form of decreased mortality rates. There is no effect on the quantity of surgeries performed. There is, however, an effect on the underlying allocation of resources. More resources are now being spent on medical care than would otherwise be. If third party payers or society as a whole does not desire this, methods of controlling the price increases of monopoly hospitals should be implemented, or an alternative policy of increasing the quality of surgery should be found.
It is conceivable that volume-based referral could actually have the unintended consequence of lowering the quality of care in some cases. Monopolist high volume hospitals might want to increase prices. However, hospitals are subject to price controls, specifically for Medicare patients under the DRG system. Unable to increase prices, hospitals could decrease the quality of care, thus effectively decreasing the price. This effective price reduction could have the effect of partially offsetting or even reversing the quality increases that are targeted by a volume-based referral policy. However, due to the quality bias of hospitals and physicians commitment to quality care, it seems unlikely that hospitals would decrease quality in this way. Furthermore, it would be political suicide for a hospital if it became public that they delivered lower quality care to Medicare patients. Thus this quality effect (effective price reduction) of monopolist high volume hospitals seems unlikely.
Volume-based referral may also have an effect on prices charged by borderline hospitals. Borderline hospitals are hospitals that are on the borderline between being high volume and low volume hospitals. Borderline hospitals have incentive to charge lower prices for surgery in an attempt to increase volume so that they can become and stay high volume hospitals, thus becoming referral centers for low volume hospitals. However, it is also possible that borderline hospitals will increase the number of discretionary procedures performed in order to increase their volume, offsetting or reversing the cost savings from their charging lower prices.
Several empirical studies have been conducted on the relationship between volume and the cost of surgery. Dimick et al. (2001) studied the quality and economic effects of volume for esophageal resection. They found that surgery charges were $11,673 lower in HVHs, a reduction of 35% from the priced charged by LVHs. Quality was also increased for HVHs. Mortality rates were 16% in LVHs and 2.7% in HVHs. There was also a 6-day reduction in length of stay at HVHs. Gordon et al. (1999) studied volume's impact on quality and economic outcomes of complex gastrointestinal surgery. They found a $2,425, or 14% reduction in charges at HVHs. This reduction in charges was accompanied by lower mortality rates (2.9% compared to 12.7%) and a shorter length of stay (14.0 vs. 15.7). One study found increased costs of surgery at HVHs. Kuo et al. found $755 higher costs at HVHs for esophagectomy, but the increase was not statistically significant. The decrease in mortality rate from 9.2% to 2.5%, the 2-day decrease in median length of stay, and the 3-day reduction in median intensive care unit stay all were significant. The prevalent literature finding a significant relationship between costs and volume finds that increased volume decreases costs.
Be Sure to Continue to Page 4 of "The Quality and Economic Implications of Volume-Based Surgery Referral".
