Tuesday, February 22, 2011

More on Economy of Scale

Blog reader and fellow parishioner Steve Wenner asks if I could provide some insight why large hospitals fail to realize economies of scale.

The short and truthful answer is that I can’t say that I know the reason and, apparently, neither can anyone else.

But I can speculate.

A number of years ago my interest was piqued and I went to the Business School library of the University where I was working to look for some scholarly writings on the topic. I couldn’t find any. Apparently the subject of economy of scale lacks the pizzaz needed to command academic attention.

I did learn that the concept was attributed to Adam Smith, the renowned 18th century moral philosopher turned economist whose book, The Wealth of Nations, is credited as providing the foundation of modern capitalism.

Using the example of a pin factory, Smith contended that a group of workers, each performing one of the functions of pin-making – like forming the head or sharpening the point – could make more pins per worker than if each was making an entire pin by himself. In other words, scale results in economies because it permits the specialization of labor.

What Smith did not explore was what happened if the organization grew to include many people making pinheads and honing pinpoints. In Smith’s simple example, one of the workers might well have been the owner and manager of the factory. No CFO or human resource department.

Although I have no evidence other than the general experience that cost rises with the size of the hospital, I suspect it has to do with the need for a larger administrative superstructure, the greater effort required to keep track of materials and move them about and the expanded need for creating and communicating the information required to coordinate activities.

As to specialization, the health care workforce is largely structured by a deeply entrenched guild-like system so that the functions of nurses, pharmacists, therapists, etc. are basically the same in hospitals of all sizes so that there is little flexibility to rearrange duties among various categories of staff. Once a certain size is reached, it is mainly a matter of increasing the number of people performing any given function.

It is for sure a subject that we ought to know more about.

Saturday, February 12, 2011

A Threat to Big Hospitals

One of the most enduring myths in health care is the belief that hospitals get more efficient as they grow. The belief is based on the economic doctrine of economy of scale, which holds that unit costs go down as volume rises. It happens not to apply in hospitals – at least in hospitals of common size – but the myth has persistently survived the common knowledge that the cost of care in big hospitals is higher than it is in small ones.

Economic pressures may be forcing some reality into the situation. The February 10, 2011 issue of The Boston Globe reports that health insurance companies in Massachusetts are offering policies under which patients that choose the large, expensive hospitals will pay a significantly higher deductible. The intention, obviously, is to steer patients towards the smaller, less costly facilities. The premiums for policies that have that feature are lower than they are for policies that do not and, according to the Globe article, small business are snapping them up.

The article didn’t make much of a splash, but the long-term implications are likely to be profound. In the modern history of hospitals, size has been considered a virtue, supported by the myth of economy of scale as well as by what for a long time was the reality of better quality. The great hospitals everyone admires, like Johns Hopkins, Massachusetts General and the various University Hospitals are all large and highly specialized. No great honor or respect has been attached to the many small hospitals that have dotted both urban and rural landscapes.

But in recent times, small hospitals have improved greatly. Thanks to accreditation, better training of health professionals, and other factors, quality of care provided by most of them is now quite respectable – often very good. They are readily accessible to their clienteles and tend to be more user-friendly than their larger counterparts.

Their cost advantage has not been important to people with comprehensive health insurance, but it obviously matters to insurance companies that are under pressure to hold down premiums.

The article reported that the large hospitals were expressing reservations about the new policies. Understandably so. This new approach is a threat to them. A large portion of their patients – maybe as many as half - could probably be as well if not better treated in small hospitals, and at lower cost. If the new policies catch on, it could spell serious trouble for these big institutions.

Monday, February 07, 2011

Management of Care

As I have no doubt mentioned before, it is our general belief as a society that human activity is more efficient and productive if it is managed.

We apply that belief to almost every activity in which we are involved, with the notable exception of health care. In health care, we manage hospitals, we manage clinics, we manage laboratories and insurance companies, but as a general matter we do not managed care. I am currently under the care of five specialists and a family practitioner, but there is no formal relationship among them, none is responsible for what any of the others of them might be doing, and no one exercises any oversight over the group. One might suggest that the family practitioner should play this role, but the specialists are not accountable to her. Some of them give her reports, but otherwise pay her little attention.

I have recently been reminded of all that again by an article in the January 24 issue of the New Yorker magazine by Atul Gawandi, the Harvard surgeon who has become a popular author on health care issues. Gawandi writes about three physicians who have become involved in attempts to manage care.

The first, Jeffrey Brenner, is a family physician in Camden, New Jersey. Serving on a police reform commission, Brenner got exposed to the technique of mapping the incidence of crime and then concentrating law enforcement on high crime areas; so-called “hot spots.” From a data base built on hospital records he was able to identify the neighborhoods with the highest incidence of serious assaults. That got him interested in patterns of hospital use generally and he discovered that there were also “hot spots” of hospital use. He also found out that one percent of the people who used Camden medical facilities accounted for thirty percent of the cost.

One thing led to another and he now heads an organization called the Camden Coalition of Healthcare Providers that specializes in managing hard-to-care-for patients with multiple diagnoses. While the initial motivation was to improve the care these patients received, there has been a major impact on cost. For the first thirty-six patients, hospital utilization has been reduced by forty per cent and hospital bills by fifty-six per cent.

The second doctor was Nathan Gunn, who works for a company called Verisk Health. Using the same sort of data mining techniques, Verisk consults with employers and health insurance companies to identify their high users and suggests strategies for reducing unproductive and costly utilization.

The third doctor, Rushika Fernandopulle, works in an Atlantic City facility called the Special Care Center. The Center was created to address the cost of providing care to high-utilizing members of the casino workers’ union and employees of a hospital, AtlantiCare Medical Center, by focusing responsibility for the management of their care.

So it looks as though a few efforts to manage care are beginning, with special emphasis on patients using services at a high rate, with generally good results.

Perhaps the rest of us could benefit, too, if only somebody had the opportunity to try.

Thursday, February 03, 2011

Legal Complications of Healthcare Reform

It seems that the issue of the legality of the mandatory coverage provisions of the Patient Protection and Affordable Care Act, aka health care reform, is not as simple as I thought.

Responding to my posting of January 25 on the subject, Jim Walworth points out a number of complications.

For one, the constitutional grant of authority to the federal government is over interstate commerce, not commerce in general.

For another, it is not clear whether, from the legal standpoint, health insurance and health care are related ‘commercial’ activities or separate. It was only with the advent of HMO’s that organizations were created to do both.

Thirdly, the courts have long held that insurance is a state function and not interstate commerce. Hospitals, doctors and other providers of health care are also licensed and regulated by states and not by the federal government.

Jim, now retired, spent the closing years of his career as head of Health Alliance Plan, a large HMO that operates as part of Henry Ford Health System in Detroit. So he knows what he is talking about.

The law is clearly headed for the Supreme Court and if the decision is that the federal government does not have the authority to regulate health insurance, it will knock a big hole in the federal health care reform effort and send the whole issue back to the states.

Jim’s comments can be seen in the original by going to the January 25th posting and clicking on ‘comments.’

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