Hospital Bed Capacity, Interdependency and Arguments about Economic Efficiency
Hospital Beds as an Economic Good
The building and maintenance of hospital beds is a difficult economic proposition. Each hospital must decide within the market rules are designed by each state in the United States, how many beds make sense for that facility. Hospital beds are expensive to maintain and represent a high fixed cost. Much of the costs of a hospital bed must be incurred regardless of actual capacity (Green, 2002)[1]. An empty bed loses money and is not available to help cover fixed costs.
Planet Money Show and Hospital Beds
National Public Radio’s (NPR) show “Planet Money” recently had story about the issue of hospital bed economics.
https://www.npr.org/sections/money/
They cite during the show Prof. Zack Cooper from the Yale School of Public Health who talks about the efficiency and inefficiency of hospital beds. Cooper states in the piece that, “If there are beds, those beds would have gotten used” and “spare capacity gets used inefficiently”. Cooper is expressing Roemers law of medicine which basically states that if you build more beds, they will be used. This is similar to the principle in transportation economics that building more highway lanes simply leads to more traffic congestion. Here we will focus on the use of the words efficiency and inefficiency and not on whether the underlying dynamics are right or wrong regarding Roemers law.
Economic Efficiency and ILE
We can recall that there are several ways in which the word efficiency is used in economics. Productive efficiency is the idea that a firm acts in a profit maximizing or cost minimizing fashion and ensures that they are using inputs relative to outputs to achieve those goals. While one can question this principle, that is not what we intend to do here. Production efficiency is accepted here as fair set of ideas to explain the world for now. Technical (meaning best use of inputs to achieve output) and price efficiency (input costs relative to output price) are combined in the idea of production efficiency. Does Cooper mean in his statement that hospitals are production efficient?
A second use of efficiency is the idea of economic efficiency. In economic efficiency, there are consumption efficiency, production efficiency and finally economic efficiency is defined as where production and consumption efficiency are equated.
A firm, regardless of the market rules that prevail, will be able to act in a productively efficient manner to maximize profits. The profits made under one set of rules may be different than that under a different set of rules but if we abide by the production efficiency principle a from should and will act to maximize profits regardless of market rules. The firm may not like a certain set of rules and may lobby to change those rules.
Economic efficiency which we define as a form of Paetro optimality is the idea that no one can be made better off without making another worse off. Another way to think about it is that there no trades to be made. Lang argued that “it is essential that the analyst avoid the temptation to compare benefits to group A with costs to group B and then to conclude that one policy or the other is superior in terms of economic efficiency” (Lang, pg. 775, 1980). There are an infinite number of Paetro optimal or economically efficient points and to compare them is to engage in a normative exercise of “whose interests count”.
Having more hospital beds may in fact lead to Roemers law. For the payer of health care services, in this case the state and federal government and even private insurance companies, more hospital beds may in fact lead to greater costs. There is research to back up the point that cost of care and the supply of beds and other facilities are highly correlated[2]. Roemers law appears to reflect that the production efficiency actions of one actor, the hospital, is a burden of another actor, the payer.
So, in what sense is efficiency being used here? The payer of health, private and public, seeks to minimize the cost being laid out. The insurance company seeks to maximize profit and the government seeks to minimize cost as two behavioral hypotheses. Restricting hospital beds is in their interest as set of market rules. fewer beds as a market rule shifts the production efficiency of the hospital but doesn't impact the fact that the hospital will still scheme production efficiency under the new rules.
It is less favorable to those who may need the services of the hospital especially in a pandemic. One set of rules would favor the interests of the hospitals. Another set of rules would favor the hospital payers. Economic efficiency cannot be used to sort our which sets of rules would be the “best one”. Roemers law, which may very well be technically true, is clearly a law that favors the interests of the payers of healthcares which are public and private insurance providers.
It is less favorable to those who may need the services of the hospital especially in a pandemic. One set of rules would favor the interests of the hospitals. Another set of rules would favor the hospital payers. Economic efficiency cannot be used to sort our which sets of rules would be the “best one”. Roemers law, which may very well be technically true, is clearly a law that favors the interests of the payers of healthcares which are public and private insurance providers.
Another study helps shed light on the issue of hospital capacity and economic efficiency. Capps and others (2006) argue and find that the welfare efficiency of a hospital closure is differentiated across actors. For the local community, the welfare loss of a hospital and hospital beds includes jobs, local spending and patient access. Perhaps in today’s world telemedicine can offset some of the specific losses related to patient access. The state and federal government can generate significant savings through a hospital closure. Their argument goes further and states that hopstials with low occupancy rates or those that are generating financial loss may well be closed to generate social surplus for the nation as a whole if not the local community. They write that, “urban hospital closures increase total welfare”. Again we see the problem that hospital closure or the number of hospital beds is a question of whose interests count. We cannot hide behind arguments related to total welfare or economic efficiency. These authors at least lay out the fact that there are different interests and some welfare losses very explicitly.
Conclusion
This is semantics and semantics matter when we are discussing policy and the implications in the real world. Cooper and Roemer as using the idea of economic efficiency when in fact what they really mean production efficiency or at least closer to that idea. Hospitals will adapt to the hospital bed restrictions and realize a new level of production efficiency. This new level of production efficiency is what is intended and desired by health care payers, but may not be in everyones interests. Economic efficiency should be used carefully and properly when providing policy makers with information and analysis.
Comments
Post a Comment