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.

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